Itaú BBA - The CLP bucked the LatAm trend amid oil rout

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The CLP bucked the LatAm trend amid oil rout

May 25, 2017

Opec together with Russia and other non-members agreed to prolong their accord through March 2018, frustrating market expectations of a more aggressive deal.

With information available until 6:30pm Brasilia time

Highlights

  • At the Opec meeting, the producer group together with Russia and other non-members agreed to prolong their accord through March 2018, frustrating market expectations of a more aggressive deal. Commodities posted losses (CRB futures: -1.50%) in the session as oil prices dropped (WTI: -5.28% to USD 48.65/bbl) after the Opec meeting. 
  • In LatAm FX, oil-exporters posted losses (COP: -0.37% to 2,918.66/USD; MXN: -0.32% to 18.50/USD). However, on the import side, the CLP appreciated 0.45% to 669.41/USD. At last, the BRL mildly appreciated to 3.2752/USD (+0.07%). 

Macro Backdrop

BRAZIL
  • Tax collection came at BRL 118.0 billion in April, beating our call (BRL 114.6 billion) and market expectations (BRL 115.5 billion). Tax collection returned to the black ink after a weak result last month (-1.2% y/y), confirming an increasing trend compared to last year (0.7% ytd). As the Federal Revenue Service reported, taxes more linked to economic activity keep a slow recovery, while higher royalties’ revenues influenced the positive print in the month. Looking ahead, it will be very important to monitor the risk of another round of disappointments in economic activity and tax collection, especially considering the more uncertain outlook for the approval of the pivotal Social Security Reform. As so, complying with the 2017 target of a 139 BRL billion deficit could be a more challenging task. 
  • The central government posted a BRL 12.6 billion surplus in April,  much better than our call (at BRL 8.2 billion) and market expectations (BRL 7.2 billion). Revenues came BRL 1.9 billion higher while expenditures came BRL 2.4 billion lower than our forecast. Revenues were boosted by higher oil royalties and non-tax revenues such as the payment of airport concessions, while the surprise in expenditure reflected mostly lower discretionary expenditure, confirming the strong effort of the government to comply with the primary target of the year, despite the underperformance of revenues more linked to economic activity. The consolidated primary result for April will come through Friday (May 25). We expect a BRL 13.0 billion surplus with a BRL 2.0 billion surplus in regional governments and a BRL 0.3 billion deficit in state-owned companies.
  • New loans expand and overall delinquency declines in April. According to the credit figures released by the BCB, the daily average of new non-earmarked loans increased 3.8% mom/sa in real terms, while new earmarked loans climbed 23.1% mom/sa (after falling 14.3% in March). Overall, delinquency slid 0.1 p.p. to 3.9% (seasonally adjusted). Interest rates charged on non-earmarked loans dropped to 49.1% (from: 52.5%), declining for non-financial corporations and households alike. Average spreads in these transactions also narrowed for both segments. Meanwhile, average interest rates charged on earmarked loans receded to 9.9% from 10.5%, sliding for non-financial corporations and households. Average spreads in these transactions decreased for non-financial corporations and remained stable for households.
  • Gasoline (-5.4%) and diesel (-3.5%) prices at refineries were reduced.
  • In the roll over auction, the BCB placed the full offering of 8,000 FX swaps. After closing, the central bank called for a roll over auction of up to 8,000 contracts on May 26. 
MEXICO
  • Mexico’s current account deficit is narrowing significantly, on the back of an improving trade balance and solid remittances. Tellingly, the Central Bank revised the annual current account deficit recorded in 2016, to USD 22.4 billion (2.1% of GDP) from USD 27.9 billion (2.7% of GDP). In the first quarter of 2017, the CAD came in at USD 6.9 billion - closer to our forecast (USD 6.8 billion) than to market expectations (USD 6.5 billion, as per Bloomberg) - which brought the four-quarter rolling deficit to USD 22 billion (2.1% of GDP). At the margin, the seasonally-adjusted CAD was 2.2% of GDP in 1Q17. Looking at the breakdown of the last four quarters, we note that the trade deficit is on a narrowing path, transfers are improving (driven by a more dynamic U.S. economy), the services deficit is small and broadly stable and net income payments account for the bulk of the current account deficit. 
  • We have revised our current account deficit forecast for 2017 (to 1.7% of GDP, from 2.3%). The CAD will likely continue narrowing as the economy experiences a rebalancing in its sources of growth (with stronger exports and weaker domestic demand). Exports will be boosted by firmer U.S. industrial output and a real exchange rate at very competitive levels. Imports, in contrast, will be curbed by weaker domestic demand (which will slow down because of tighter macro policies, higher inflation, and NAFTA uncertainty that discourages investments). From a funding perspective, the risk of NAFTA renegotiation escalating into protectionism will likely affect FDI, while higher U.S. treasury yields could have negative implications on portfolio inflows (even though Banxico’s rate hikes and a more stable MXN could act as a cushion). 
  • The trade deficit narrowed further April. The trade balance posted a USD 617 million surplus, narrowing the 12-month rolling deficit to USD 9.2 billion (from USD 11.9 billion in March), with a major improvement in the non-energy surplus (USD 5.4 billion, from USD 2.7 billion in March) and a wide energy deficit of USD 14.6 billion (unchanged). The trade balance also showed a significant improvement at the margin. In fact, the three-month, seasonally-adjusted, annualized deficit narrowed to USD 8.3 billion (March: USD 11.3 billion). Manufacturing exports were robust (5.1% qoq/saar), in spite of weaker auto exports, while non-oil imports grew at a slower pace (3.7% qoq/saar). Looking ahead, we believe the trade deficit will narrow more in response to higher U.S. industrial growth, a competitive real exchange rate and a deceleration of internal demand. Full Report
Market Developments 
  • GLOBAL MARKETS: US equity markets were on the green as the VIX is currently at historical lows (below 10). At the Opec meeting, the producer group together with Russia and other non-members agreed to prolong their accord through March 2018, frustrating market expectations of a more aggressive deal. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses in the session as oil prices dropped (WTI: -5.28% to USD 48.65/bbl) after the Opec meeting. Also, iron ore prices further decreased (-1.33%) and soybean fell 0.92%. In LatAm FX, oil-exporters posted losses (COP:  -0.37% to 2,918.66/USD; MXN: -0.32% to 18.50/USD). However, on the import side, the CLP appreciated 0.45% to 669.41/USD. At last, the BRL mildly appreciated to 3.2752/USD (+0.07%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. Chilean and Colombian spreads stood flat at 70bps and 123bps, respectively. CDS in Mexico widened 1bp to 114bps. In Brazil, county risk went up 4bps to 241bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Short Brazilian yields narrowed 1-3bps. In DI futures, the Oct-17 fell 3bps to 9.88% and the Jan-19 went down 2bps to 9.65%. On the other hand, long rates widened as the Jan-20 went up 3bps to 10.25%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican rates widened 3-4bps. In TIIE swaps, the 1-year increased 2bps to 7.55% and the 10-year went up 4bps to 7.61%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long yields traded marginally higher. In Camara swaps, while very short rates were mixed (6-month: -2bps to 2.47%; 1-year: +1bp to 2.53%), long widened (5-year: +3bps to 3.54%). Chile Rates Tracker In Colombia, short rates narrowed in the session. In IBR Swaps, the 6-month went down 2bps to 5.45% while the 5-year was broadly flat at 5.33%. Colombia Rates Tracker

Friday Events

  • In Brazil, the consolidated primary budget balance for April will come through. We expect a BRL 13.0 billion surplus. Then, FGV construction confidence will be released.
  • In Mexico, the statistics institute (INEGI) will announce April’s unemployment rate. We expect the unemployment rate to post 3.3% (below the 3.8% rate recorded in the same month of last year) given that labor market conditions remain tight. 
  • In Colombia, the central bank hosts its monthly monetary policy meeting. Last month, a split board surprised the majority of the market by cutting the policy rate by 50bps to 6.50%. We believe that the increased concern with activity will likely lead a majority of the board to favor a second consecutive 50-bp cut to 6.00%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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