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Colombian yields widen on Banrep communication

September 13, 2017

The belly of the Colombian curve widened (2-year: +2bps to 4.82%).

With information available until 6:30pm Brasilia time

Highlights

  • The belly of the Colombian curve widened (2-year: +2bps to 4.82%) after co-director Ocampo’s suggested in a speech that Colombia has to a large extent already finished its adjustment as far as monetary policy is concerned. 
  • LatAm FX (-0.29%) posted losses on a strong USD day (DXY: +0.59%). The COP (-0.09% to 2,912/USD) and the MXN (-0.10% to 17.7462/USD) weakened at the margin as oil prices increased. The CLP depreciated 0.81% to 627.40/USD as copper prices fell 1.75%. The BRL trimmed earlier losses (-0.40% to 3.1386/USD) as markets increased the odds of a full roll over of the FX swaps coming due in October (USD 10 billion). Governor Ilan Goldfajn hinted in an interview that the BCB is comfortable with the current outstanding amount of FX swaps. 
  • Strategy Monthly: weak activity and stable currencies leave room for further monetary easing in LatAm. We expect a pause in Banrep’s easing cycle, and see rate cuts resuming in 1Q18. In Chile, Camara swaps staged a hefty correction after BCCh released the 3Q IPoM. In Brazil, a recovering economy and inflation that is at the (likely) bottom of this cycle support the Copom’s intention to slow down and eventually end the easing cycle. Full Report
Macro Backdrop

BRAZIL

  • According to the IBGE’s monthly services survey (PMS), services sector real revenue fell 0.8% mom/sa in July, following three positive months. The year-over-year growth came at -3.2%, well below consensus (-1.9%) and our forecasts (-1.7%). Only 3 out of 12 activities showed positive growth, so the diffusion of activities came in line with the weak headline. The highlight was the 2% mom/sa decline in “professional services”. This activity is at the same time material (23% of the aggregate index, and the main proxy for 15% of GDP) and volatile, so it is usually ‘guilty’ for the majority of surprises in the headline. Despite the weak result, the broad set of indicators remains consistent with positive GDP Growth in 3Q17.
MEXICO
  • The Ministry of Finance submitted the 2018 budget bill to Congress, laying out the details of the final year of the fiscal consolidation plan which aims at decreasing the public sector’s borrowing requirements (PSBR) to 2.5% of GDP; that is, a level sufficient enough to decrease the public-debt-to-GDP-ratio on a sustained basis. The modest budget cuts proposed for 2018, in contrast with the deep cuts featured in the 2016 and 2017 bills, indicate that the government has no intention to outperform the fiscal targets set for 2018, in the midst of the electoral cycle (with presidential, legislative, and gubernatorial elections to be held in July 2018). The 2018 budget bill expects that – excluding extraordinary revenues and expenditures (largely those associated to the Central Bank’s dividend) – revenues will increase by MXN 40.7 billion in 2018 (0.9% in real terms, 0.2p.p. of GDP) with respect to the estimated value for 2017 (rather than the value in the 2017 Revenues Law), assuming GDP growth of 2.5% (from 2.3% in 2017), average oil prices of USD 46/bl (from 43 in 2017), average oil output of 1,983 thousand barrels per day (from 1,944 in 2017), and USDMXN exchange rate of 18.1 (from 18.7 in 2017).
  • Overall, we believe that Mexico’s public finances are transitioning into more benign dynamics, but next year’s electoral cycle and the possibility that economic policies veer strongly towards the left (beyond 2018) pose risks. After nine consecutive years of posting increases (from 18.1% of GDP in 2007 to 49.6% of GDP in 2016, a breakneck pace), the net-public-debt-to-GDP ratio will likely fall in 2017 (to 47.9% of GDP, according to the Finance Ministry’s estimate). This decrease is largely explained by the MXN appreciation – which decreased the local currency value of foreign debt – and, to lesser extent, by the Central Bank’s dividends (as the Federal Budget & Treasury Responsibility Law requires the government to use 70% of the dividend to amortize public debt and/or reduce borrowing requirements); both temporary factors. Nevertheless, the fact that the Mexican government is succeeding at narrowing the PSBR will improve debt dynamics in the long-term (as per the 2018 budget bill, Hacienda expects the net-public-debt-to-GDP ratio to decrease on a sustained basis from 2017 onwards, reaching 44.5% of GDP by 2017).
Market Developments 
  • GLOBAL MARKETS: The USD strengthened across the board on increased market expectations that the Trump administration will deliver a tax reform. Likewise, US treasuries widened (5-year: +3bps to 1.77%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil (WTI: +0.53% to USD 48.88/USD) led commodities higher as the market digested DOE inventory data showing a build of 5.9 million barrels, larger than consensus but below Tuesday’s API figure. In addition, IEA revised upward its global demand estimates. LatAm FX (-0.29%) posted losses on a strong USD day (DXY: +0.59%). The COP (-0.09% to 2,912/USD) and the MXN (-0.10% to 17.7462/USD) weakened at the margin as oil prices increased. The CLP depreciated 0.81% to 627.40/USD as copper prices fell 1.75%. The BRL trimmed earlier losses (-0.40% to 3.1386/USD) as markets increased the odds of a full roll over of the FX swaps coming due in October (USD 10 billion). Governor Ilan Goldfajn hinted in an interview that the BCB is comfortable with the current outstanding amount of FX swaps. FX & Commodity Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor gave back recent gains. In Colombia, Mexico and Chile CDS inched up 1bp to 115bps, 99bps and 55bps, respectively. In Brazil, however, credit spreads widened 3bps to 184bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The belly of the Brazilian curve narrowed in the session. In DI futures, the Oct-18 fell 4bps to 7.43%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates widened at the margin, on higher core yields. In TIIE swaps, the 1-year went up 1bp to 7.29% and the 5-year increased 4bps to 6.78%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 1-2bps upwards, as US yields widened. In Camara swaps, the 5-month increased 2bps to 3.41%. Chile Rates Tracker The belly of the Colombian curve widened after Banrep’s communication (2-year: +2bps to 4.82%). Co-director Ocampo’s suggested in a speech that Colombia has to a large extent already finished its adjustment as far as monetary policy is concerned. This would be in line with our view that last month's monetary policy rate reduction of 25bps is likely the last cut of the year. We expect to see more information in the minutes of that meeting to be published on Friday (September 15). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the BCB will release its monthly activity index (IBC-Br) for July (Thu.). 
  • In Chile, the BCCh will hold its September monetary policy meeting (Thu.). In the absence of data surprises, we expect the central bank to hold the policy rate stable at 2.5% and keep a neutral bias. 
  • In Colombia, activity indicators for the month of July will be published (Fri.). We expect industrial production to rise 6.8% year over year. Meanwhile, retail sales likely saw growth of 2.2% in twelve months. Then, Banrep will release the minutes of the monetary policy meeting held in August (Fri.). The minutes may provide the context in which more easing this year would be likely. 
  • In Argentina, the INDEC will release the unemployment rate for 2Q17 (Thu.). We expect a reduction in the unemployment rate to 9.0% from 9.3% in the same quarter one year ago. 

Latam Macro Calendar

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa


Macro Reports

MEXICO – Fiscal consolidation will conclude in 2018, reversing the upward trend of public-debt-to-GDP

Mexico’s Ministry of Finance (“Hacienda”) submitted the 2018 budget bill to Congress, laying out the details of the final year of the fiscal consolidation plan (announced in 2013) which aims at decreasing the public sector’s borrowing requirements (PSBR, broadest measure of the fiscal deficit) to 2.5% of GDP; that is, a level sufficient enough to decrease the public-debt-to-GDP-ratio on a sustained basis. Back in 2014, the public sector’s borrowing requirements swelled to 4.6% of GDP (from 3.7% of GDP in 2013), as the fiscal consolidation plan presented to Congress in September 2013 also included a waiver request for 2014 (to accommodate a temporary fiscal stimulus amid the implementation of the structural reforms). Since then, nevertheless, the Mexican government has made progress in its fiscal consolidation objectives. Granted, the massive Central Bank dividends provided to the government in 2016 (1.2% of GDP) and 2017 (1.5% of DP) – the outcome of exchange rate gains on international reserves – have helped a lot. But the improvement in the fiscal accounts is evident, especially in 2017, even after netting out the effects of the dividends (netting out only 70%, considering that 30% of the dividend is directed to financial investments and therefore recorded as both revenues and expenditures). In fact, between July and August, three rating agencies (S&P, Fitch, and the local HR) have revised Mexico’s credit rating outlook to stable (from negative), acknowledging the progress of the fiscal consolidation.

The modest budget cuts proposed for 2018, in contrast with the deep cuts featured in the 2016 and 2017 bills, indicate that the government has no intention to outperform the fiscal targets set for 2018, in the midst of the electoral cycle (with presidential, legislative, and gubernatorial elections to be held in July 2018). The targets set for 2017 – mainly, PSBR of 2.9% of GDP with an implicit assumption of a primary surplus of 0.4% of GDP (the first primary surplus in nine years) – will likely be surpassed by a wide margin because of the dividend. In fact, Hacienda estimates PSBR of 1.4% of GDP for 2017. The targets for 2018 – specifically, PSBR of 2.5% of GDP with an implicit assumption of a primary surplus of 0.9% of GDP – are a bit more ambitious, yet the government will not have the help of a Central Bank dividend to meet them (as the Mexican peso has appreciated in 2017, thereby eliminating the chances of a dividend next year).  Against this backdrop, the 2018 budget bill expects that – excluding extraordinary revenues and expenditures (largely those associated to the Central Bank’s dividend) – revenues will increase by MXN 40.7 billion in 2018 (0.9% in real terms, 0.2p.p. of GDP) with respect to the estimated value for 2017 (rather than the value in the 2017 Revenues Law), assuming GDP growth of 2.5% (from 2.3% in 2017), average oil prices of 46 USD/bl (from 43 in 2017), average oil output of 1,983 thousand barrels per day (from 1,944 in 2017), and USDMXN exchange rate of 18.1 (from 18.7 in 2017). Under the same comparison terms (as for revenues above), the cuts of programmable expenditures would add up to MXN 90 billion (0.4p.p. of GDP), far less than in 2016 (1.2p.p. of GDP) and 2017 (1.1p.p. of GDP). Total net expenditures (that is, net from double counting), however, are only expected to decrease by MXN 11.2 billion (0.2% in real terms, 0.1p.p. of GDP), pressured by interest payments and transfers to regional & local governments.  


 

Overall, we believe that Mexico’s public finances are transitioning into more benign dynamics, but next year’s electoral cycle and the possibility that economic policies veer strongly towards the left (beyond 2018) pose risks. After nine consecutive years of posting increases (from 18.1% of GDP in 2007 to 49.6% of GDP in 2016, a breakneck pace), the net-public-debt-to-GDP ratio will likely fall in 2017 (to 47.9% of GDP, according to Hacienda’s estimate). This decrease is largely explained by the MXN appreciation (14% year-to-date) – which decreased the local currency value of foreign debt – and, to lesser extent, by the Central Bank’s dividends (as the Federal Budget & Treasury Responsibility Law requires the government to use 70% of the dividend to amortize public debt and/or reduce borrowing requirements); both temporary factors. Nevertheless, the fact that the Mexican government is succeeding at narrowing the PSBR will improve debt dynamics in the long-term (as per the 2018 budget bill, Hacienda expects the net-public-debt-to-GDP ratio to decrease on a sustained basis from 2017 onwards, reaching 44.5% of GDP by 2017). Of course, this is not to say that that there no risks looming. In the short-term, the electoral cycle may put pressure on government spending. As shown in the chart above, net public expenditures increased in all of the last four electoral years (on average, by 0.5p.p. of GDP). However, we believe that derailing the fiscal consolidation plan would also be costly for the ruling party (PRI) in political terms (after all, stabilizing the public debt dynamics could be one of the most important achievements of the Peña Nieto administration, regardless of the sharp increases in the first four years).  From a more long-term perspective, the high odds that the left-wing candidate, Andrés Manuel López Obrador (AMLO), wins the presidential election in 2018, is also a risk for the fiscal outlook. Even though AMLO has pledged to be fiscally responsible if he assumes the presidency, we find it hard to reconcile some of his actual policy proposals (doubling of pensions, free tertiary/superior education, subsidies for unemployed youth, hike of minimum wage) with the principles of fiscal conservatism.

Alexander Muller



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