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Chile’s Monetary Policy Meeting: Following the global liquidity tide

April 1, 2019

Stable rates for most of this year is the likely base case scenario

See our Week Ahead note at the end of this report.

Talk of the Day

Chile

Following the decision in January to implement the second rate hike (to 3.0%) in the normalization cycle, the board of the central bank unanimously opted to stay on hold this month and indicated low rates for longer. While the board highlighted recent activity data (4Q18) confirms its upbeat non-mining activity outlook, the surprisingly low inflation is viewed to not solely be due to methodological changes, but also to greater economic slack. Hence, the retention of monetary stimulus for a longer period than previously anticipated is required to ensure inflation converges to the 3% target in the medium-term. Overall, this is in line with stable rates for most of this year.

The central bank will complement this decision by updating its baseline scenario in its flagship quarterly Inflation Report (IPoM).Weaker momentum at the start of the year could result in the growth forecast for this year to be shaved from the current 3.25%-4.25%, while inflation convergence to the target is slower. Considering the riskier global environment, the notable dovish turn by the Fed, and the view that the output gap is wider than previously estimated, the central bank is set to introduce an even more gradual monetary normalization path (versus the previous view of reaching neutral levels, 4%-4-5%, by mid-2020). We still expect only one further 25bp rate hike later this year, taking the policy rate to 3.25%.
**Full story
here.

Industrial production dropped 3.6% yoy in February (building on the 0.9% decline in the previous month). Mining was once again the key industrial production drag in the month of February, albeit transitory climate factors heightened the decline. Mining contracted 9.4% yoy (-4.8% previously). Meanwhile, manufacturing growth was lower (0.8% yoy vs. 2.6% in January), disappointing market expectations (Itaú: 2.2%; market consensus: 1.1%), but the composition remains favorable. Gas production led utilities growth of 0.9% (0% previously). Given this data and our expectation that retail sales was weak in the month, as new car sales plummeted, we expect growth of the monthly GDP proxy (Imacec) to stay low at 2.0% in February (2.1% in January).

Looking ahead, confidence signals are mixed. Icare’s business confidence index for March shows mining confidence far exceeding levels from one year earlier (63.9 points vs. 50.1 in March 2018; 50 = neutral). This aided headline confidence to stay in optimistic territory at 54.0 points (only a 0.3 points deterioration over twelve-months). Nevertheless, excluding the mining sub-index, total confidence was at a lower 51.7 points, down sharply from the 55.3 recorded last year. The main determinants behind this moderation came from weaker retail confidence (55.5 vs. 61.9 last year) and industrial confidence sinking back to pessimistic ground (47.7 vs. 53.0 last March). On the other hand GFK’s consumer confidence index remained in downtrodden territory for the eight consecutive month reaching 42.3 points (50. 0 one year earlier; 50 = neutral). The sharp deterioration of expectations for the country for both a 1-year and 5-year horizon led the weakening. Nevertheless, the recovery of copper prices will likely support business confidence and lead to still vigorous investment throughout the year. Low inflation and an expansionary monetary policy will foster a favorable environment for consumption despite pessimistic consumers. We see GDP growth at 3.2% this year (4.0% last year).
**Full story
here.

Regarding unemployment, a decrease in the participation rate led unemployment to surprise to the downside in February. Unemployment rate was stable over twelve months, the first occurrence since May last year, however, not all was positive. The 6.7% unemployment rate came in below the market expectation of 6.9% and our 7.0% call. Employment grew 0.5% yoy, down from 0.7% in 4Q18, but was offset by the slowdown of labor force growth to 0.6% from 1.1% as participation fell 0.7pp (the sharpest 12-month decline since the quarter ending in August 2012). 

We expect employment dynamism to improve this year. Activity recovery will likely consolidate, resulting in some tightening of the labor market (unemployment rate of 7.0% last year).
**Full story
here.

Day Ahead: Following the monetary policy decision on March 29, the central bank will present an update to its baseline scenario in its flagship quarterly Inflation Report. Considering the more risky global environment and the notable dovish turn by the Fed, the central bank will likely adopt a more cautious approach in its outlook for the normalization process.

Brazil

The national unemployment rate reached 12.4% in February, in line with our call and 0.1 p.p. below the market’s.Compared to the same month of 2018, the unemployment rate barely changed (from 12.6% in Feb-18). Seasonally adjusted, the unemployment rate receded 0.1 p.p. to 12.2%, still reflecting a slow-paced recovery for labor market in early 2019. Weak performance in employment are observed in both the formal and informal labor markets. However, the Ministry of Labor’s CAGED figures indicate improvement in formal employment since early 3Q18, which may be reflected soon in PNAD Contínua’s coming reports.
**Full story
here.

Regarding fiscal accounts, the consolidated public sector posted a primary deficit of 14.9 billion reais in February. The print came in slightly below our call (15.5 billion) and in line with market consensus (14.7 billion). The central government had a deficit of 18.3 billion reais (close to our 17.8 billion estimate) while regional governments and state-owned companies posted higher-than-anticipated surpluses of 4.8 billion reais and 0.8 billion reais, respectively. The consolidated primary deficit over 12 months receded to 1.5% of GDP in February from 1.6% in January. In our view, meeting the public sector’s annual primary deficit target of 132 billion reais requires discipline, but shouldn’t be so challenging.

The general government’s gross debt increased marginally to 77.4% of GDP in February from 77.3% in January, while the public sector’s net debt remained at 54.4% of GDP. Over 12 months, the nominal deficit excluding FX swap transactions remained at 6.9% of GDP. A favorable fiscal scenario depends strictly on the approval of reforms, such as the pension reform, that signal a gradual return to primary surpluses that are compatible with structural stabilization in public debt.
**Full story
here.

Day Ahead: March’s trade balance will be released at 3:00 PM, for which we expect a USD 5.6 bn surplus, below the USD 6.4 bn observed in the same month of last year. Additionally, March’s Fenabrave may also come out during the day.

Colombia

Colombia’s fiscal rule committee loosened the country’s deficit targets, following the extraordinary cost of Venezuelan migration to Colombia. The original fiscal plan required a 0.7pp reduction of the fiscal deficit from 2018 to reach 2.4% of GDP this year, which would have implied the largest adjustment required by the fiscal rule since its implementation in 2012. Colombia faced mounting fiscal challenges this year as Iván Duque’s administration convinced Congress to add 1.4% of GDP to the budget, with the increase to be financed by changes in the tax system. Ultimately, the reform underwhelmed and collection is expected to be only half of the amount initially planned (0.7% of GDP). Hence, despite some expenditure freezes and cuts, meeting the target was always going to be challenging despite the administration’s optimism.

The decision by the fiscal rule committee to take the costs of the Venezuelan crisis (estimated at around 0.5% of GDP) into their deliberations and loosen the fiscal target relieves some short-term fiscal pressures. Now, the committee notes that a 0.4pp deficit reduction to 2.7% of GDP is required for this year (to 2.4% previously; Itaú: 2.7%). The 2020 deficit target was eased to 2.3% of GDP (from 2.2%), while the 2021 target remains at 1.8%. However, since cyclical factors improved (with higher oil prices and larger growth) since the 2018 MTFP, the adjustment allowed is actually much larger (around 1.5pp over 5 years). The goal of reaching the 1% of GDP deficit is seen to take place in 2024 (earlier than previously expected). 

 Overall, the adjustments do not diminish the challenges faced in 2020 and beyond as corporate tax reduction becomes effective, meaning a further tax reform ahead is once more likely if rating agencies are to stay at bay. Late last year, S&P retained its “BBB-” rating with a stable outlook, and stated that Colombia might not meet, before this revision, the mandated 2.4% of GDP deficit target this year, but that would not necessarily prompt a rating downgrade. However, multi-year deficit target revisions likely mean the chance of a downgrade is rising.

The unemployment rate in February surprised to the upside, yet there were positive labor market signs. The national unemployment rate picked up to 11.8%, from 10.8% one year ago, coming in above our 11.5% forecast. The deterioration was mainly due to the urban component with the unemployment rate spiking to 12.4%, above the 11.9% print last year and the market consensus of 12.1% (Itaú: 12.0%). In the quarter ending in February, the total unemployment rate was 11.4%, up 1.0pp over twelve months, with the urban unemployment rate reaching 12.3%, above the 11.7% one year ago. Rising participation partly explains the sharp unemployment rate rise. Compared to the quarter ending in February 2018, the participation rate increased 0.5pp to 64.1%, as labor force accelerated to 2.1% yoy from 0.6% in 4Q18.

The gradual economic recovery is expected to filter through to a more dynamic labor market. A mildly expansionary monetary policy, improving business sentiment and positive signs for investment would support growth of 3.3% this year (from 2.7% in 2018) and lead to some tightening of the labor market.
**Full story
here.

Day Ahead: The minutes of March’s monetary policy meeting - at which the policy rate was kept stable at 4.25% - will be published. The report will likely show the board is in no hurry to raise rates amid a still-risky global scenario, well-behaved inflation and a gradual activity recovery.

Mexico

Day Ahead: The Ministry of Finance (MoF) will publish the preliminary economic policy guidelines for 2020 (PEPG), which includes MoF’s macroeconomic outlook and an update of fiscal estimates for 2019 and 2020.

Peru

Day Ahead: The statistics institute (INEI) will announce March’s CPI inflation, which we forecast at 0.66% month-over-month. We expect a recovery in domestic demand to push prices up. Assuming our forecast is correct, annual headline inflation would post a growth rate of 2.2% year-over-year in March (from 2.0% in February).

The Week Ahead in Latam

Argentina

On Wednesday, the central bank will release its monthly expectations survey. We expect a new deterioration of the inflation expectations. In the latest publication, analysts raised their inflation forecasts for 2019 to 31.9%, from 29.0%.

Also on Wednesday, the car-makers association (ADEFA) will release March data on production, exports and domestic sales to car dealers. Auto production fell 16.4% yoy in February and exports increased 1.0% yoy. Domestic sales plummeted 58.8% yoy affected by the depreciation of the peso against the dollar and high interest rates. 

Manufacturing and construction data for February will see the light on Thursday. We expect to see a new year-over-year drop in manufacturing (-10.8% in January). According to the IPI (a private index published by OJF consulting firm), manufacturing fell 9.2% in February. Construction activity also contracted in February according to private indicators like Grupo construya index (-13.2% yoy).

Brazil

On economic activity, next week’s highlight will be February’s industrial production, to be released on Tuesday. We forecast a 1.6% gain on a seasonally adjusted monthly basis, after a 0.8% drop in January. Despite this positive result expected for February, the trend of industrial production growth remains weak. Auto sector indicators for March will also come out: Fenabrave’s vehicle sales (probably on Monday) and Anfavea’s auto production (on Thursday).

March’s trade balance will be released on Monday, for which we expect a USD 5.6 bn surplus, below the USD 6.4 bn observed in the same month of last year. In month-over month-terms, exports are set to remain virtually stable and imports are set to increase by 10%. Over 12 months, we expect the trade balance to retreat slightly to USD 57.5 bn (from USD 58.3 bn) while the 3mma saar rate recedes to USD 59.2 bn from USD 68.5 bn.

On the political side, the Ministry of the Economy, Paulo Guedes, may speak at the Lower House Constitutional and Justice Committee about the pension reform on Wednesday. On the same day, president Jair Bolsonaro returns from the official government trip to Israel, and, according to the political news,  is expected to meet with the president of the Lower House, Rodrigo Maia, and other political parties’ presidents.

Chile

Following the monetary policy decision on March 29, the central bank will present an update to its baseline scenario in its flagship quarterly Inflation Report (IPoM). Considering the more risky global environment and the notable dovish turn by the Fed, the central bank will likely adopt a more cautious approach in its outlook for the normalization process. With weaker momentum at the start of the year, the growth forecast for this year is likely to be shaved from the current 3.25%-4.25%, while the release of the new inflation basket would result in a slower convergence of inflation to the target than previously expected. These expected adjustments, along with a riskier global scenario relative to the 4Q18 edition, would allow the board to express that the normalization process – justified on the view that the output gap is near closed and the policy rate remains expansionary – would unfold at a more gradual and data-dependent pace (versus the previous view of reaching neutral levels, 4%-4-5%, by mid-2020).   

On Tuesday, INE will publish the private consumption activity indicators for February. Retail activity came in below expectations at the start of 2019, dragged down by durable consumption. Retail sales including vehicles were flat over twelve months (+1.6% in December). Meanwhile, wholesale trade continued to show robustness, still favorably led by sales of investment-linked materials. Still low consumer sentiment and falling new car sales point to retail sales growth of 0.8% in February.

On Friday, the central bank will publish the GDP proxy (Imacec) for February. Mining led to a weak activity start in 2019, but there were positives from robust services. Activity grew 2.1% yoy in January (3.1% in December). Mining contracted 3.9%, but was offset by a 2.8% rise in non-mining activity. Industrial indicators for the month had milder manufacturing growth, an intensification of the mining decline, and we expect weaker retail sales growth. Overall, we expect the monthly GDP proxy (Imacec) to be flat (SA) from January and result in annual growth to tick down to 2.0% (NSA).

Nominal wage growth for February will also be released on Friday. Wage growth in January was stable at 3.8% yoy, while real wage growth edged up (to 1.6% from 1.2% in December) on the back of lower-than-expected inflation. Recovering wage growth ahead, along with low inflation and an expansionary monetary policy would support the consolidation of the consumption recovery.

Colombia

On Monday, the minutes of the March monetary policy meeting - at which the policy rate was kept stable at 4.25% - will be published. The minutes will likely show the board is in no hurry to raise rates amid a still-risky global scenario, well-behaved inflation and a gradual activity recovery.

On Wednesday, the institute of statistics (DANE) will publish exports for the month of February. Declining oil and coal exports in January reaffirm the unfavorable outlook for external accounts in Colombia. Total exports fell 7.8% year over year in January, following on from the 14.6% drop in December. We expect February exports to come in at USD 3,239 million, expanding 8% from last year.

On Friday, inflation for the month of March will be released. Inflation surprised to the downside for a second consecutive month in February by reaching the central bank’s 3% target (lowest rate since September 2014). Tradable good inflation remains the main drag (0.85%), but non-tradable inflation and the average of core measures also moderated. High frequency data for March indicates a month-over-month inflation of 0.44% (0.24% last year), lifted by a sharp rise in food prices as well as elevated beverage, housing and health prices, resulting in annual inflation of 3.22%.

Mexico

Beginning the week, the Ministry of Finance (MoF) will publish the preliminary economic policy guidelines for 2020 (PEPG), which includes MoF’s macroeconomic outlook and an update of fiscal estimates for 2019 and 2020. Unlike the 2019 Budget approved by Congress last December, the PEPG is an informative document for Congress (it doesn’t need to be approved). According to the MoF undersecretary, Arturo Herrera, the PEPG will include an initial scenario, similar from the budget approved in 2019. He added that, in a context of weak global economic activity affecting the Mexican economy, they will keep the promise of reaching the primary surplus target and increasing public capital investment (if necessary they will cut non capital investment expenditure).  

Peru

The statistics institute (INEI) will announce March’s CPI inflation on Monday, which we forecast at 0.66% month-over-month. We expect a recovery in domestic demand to push prices up. Assuming our forecast is correct, annual headline inflation would post a growth rate of 2.2% year-over-year in March (from 2.0% in February).



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