Itaú BBA - Evening Edition – Higher-than-expected job creation in Brazil

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Evening Edition – Higher-than-expected job creation in Brazil

May 24, 2019

Using our seasonal adjustment, formal job creation increased to 50k in April.

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

Talk of the Day

Brazil

CAGED formal job creation came in at 130k in April, above the market’s expectations and our forecast (both at 80k). Using our seasonal adjustment, formal job creation increased to 50k in April, taking the 3-month moving average to 30k (from 20k in the previous month). Despite April’s result, the current level of overall business confidence, which will likely decline further in May, indicates a downside bias for formal jobs creation going forward.

According to FGV monthly survey, retail confidence declined 5.4 p.p in May, to 91.4, the same level registered in September 2018. The negative result was driven both by the expectations index, which fell 6.6 p.p, and the current conditions component, which declined 4.0 p.p. This result is similar to the negative prints observed in the industrial (-1.6 p.p.) and consumer (-2.9 p.p.) confidence indicators released throughout the week.

May’s mid-month IPCA-15 inflation came in at 0.35% mom, slightly below our call (0.38%) and the market’s (0.41%).The monthly change was mostly driven by transportation (0.65%) and health and personal care (1.01%) components, each contributing with +0.12 pp to the inflation headline. In year-over-year terms, inflation advanced to 4.93% (our forecast: 4.96%; mkt: 4.99%), from 4.71% in the previous month. On core measures, core inflation remains well behaved, despite some monthly upward pressure in the core services component. We lowered our estimate for the headline IPCA in May to 0.25%, from 0.29%.
** Full story
here.

Colombia

Revealing contrasting interpretations of Colombia’s fiscal situation, Moody’s and Fitch reviewed the outlook on the country’s sovereign debt in opposing directions. While both sit at comparable rating levels (two notches above speculative), Moody’s upgraded its outlook from negative to stable, while Fitch moved to negative.

Moody’s upgraded outlook from negative to stable on its Baa2 rating came in as a surprise. Moody’s cited the economic recovery is expected to continue in 2019-21 with growth in the 3.0%-3.5% range, converging toward an estimated potential growth rate of 3.5%. Additionally, fiscal consolidation efforts by the current administration would likely stabilize the general government debt burden at 52% of GDP (currently just above 42%). Colombia's credit profile remains aligned with its Baa2 peers and is more robust than that of its Baa3 peers. The revised fiscal deficit target of 2.7% of GDP set by the country's fiscal rule is expected to be met this year. The rating agency acknowledges concerns ahead by noting the forecasted decline in revenue for the upcoming years, as a consequence of the reduction in corporate income tax rates and various VAT exemptions included in last year's tax reform. However, initiatives related to reducing tax evasion, and efforts to contain the growth in expenditure, will support a gradual decline in fiscal deficits (below 3% of GDP during the 2019-21 period). 

On the other hand, and in line with our assessment, Fitch Ratings revised the outlook on Colombia's 'BBB' long-term foreign-currency issuer default rating to negative from stable. The negative outlook reflects risks to fiscal consolidation and the trajectory of government debt, the weakening of fiscal policy credibility (given frequent changes to targets), and increasing risk from external imbalances. Fitch expects that the reduction of government tax revenues beginning in 2020, coupled with rigid spending commitments, will make further fiscal adjustment necessary to stabilize and then gradually reduce general government debt to GDP ratio towards the current 'BBB' median of 37.5%. Low growth (at 2.7%) for the next five years would limit the improvement in debt aggregates.

We note the challenges faced in 2020 and beyond are non-negligible, and it is unlikely that tax evasion measures would suffice to raise revenue sufficiently to stabilize debt. Given the weak political capital of this administration, comprehensive expenditure cuts or a significant tax reform would not be easily advanced. We note that potential asset sales (in the energy sector) could alleviate short-term needs. Meanwhile, the intensification of the trade war means growth forecast risks are tilted to the downside (our forecast for this year’s GDP is 3.1%), which would negatively affect revenue growth. Finally, we note S&P’s rating is one notch below these two agencies (BBB-) and has signaled stability in its rating. 

Mexico

GDP weakened in 1Q19, dragged by the industrial sector. Using calendar adjusted figures to account for the positive calendar effect (Easter holidays), activity grew at slower pace (0.2% yoy in the 1Q19, from 1.7% yoy in the the previous quarter). Looking at the breakdown, the industrial sector was the main drag to economic activity, decreasing 2.0% yoy in the 1Q19 (from -0.9 %). Likewise, service sector decelerated to 1.0% in the 1Q19 (from 2.7%), while primary sector accelerated to 5.8% (from 2.9%). At the margin, GDP contracted in 1Q19, as the seasonally-adjusted annualized growth rate fell to -0.7% in the 1Q19, from 0.1% in 4Q18. In 2019, we expect economic activity to slow to 1.4%, from 2.0% last year. While we note that one-off factors could be behind the economic weakness in early 2019, uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment, already affecting employment. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown.
** Full story
here.

Monthly trade balance posted a USD 1.4 billion surplus in April. The print came in above the median of market expectations (USD 0.2 billion deficit), taking the 12-month rolling deficit to USD 12.1 billion in April (from a deficit of USD 13.7 billion in March). We expect the trade deficit to remain broadly stable between 2018 and 2019. There are no signs of oil production stabilization yet and the deceleration of the U.S. economy will exert downward pressure on Mexico’s manufacturing export growth. However, uncertainty over domestic policies and the USMCA will likely curb internal demand.
** Full story
here.

The current account deficit (CAD) came in at USD 5.6 billion in 1Q19, narrower than the median of market expectations (a deficit of USD 9.0 billion). The 4-quarter rolling deficit reached 1.4% of GDP (from -1.8% in the previous quarter). At the margin, our seasonally-adjusted measure of the CAD in 1Q19 improved to -0.6% of GDP in 1Q19 (from -1.7%). On the funding side, net direct investment deteriorated in the 1Q19, although it was still enough to cover the deficit. Looking ahead, we expect the current account deficit in Mexico to remain narrow. Although lower oil production and the deceleration of the U.S. economy will exert downward pressure on Mexico’s exports, internal demand is weakening (largely reflecting the effect of uncertainty over domestic policies and trade relations with the U.S. on investment). On the funding side, data for 1Q19 shows difficult financing conditions (as direct investment was soft), even though the level of net direct investment remains adequate to fully finance the external deficit.
** Full story
here.

Peru

Peru’s GDP weakened in 1Q19. According to the Central Bank’s (BCRP) data, GDP grew 2.3% yoy in the 4Q18 (from 4.7% in the 4Q18), taking the 4-quarter rolling basis to 3.8% yoy in 1Q19 (from 4.0% in the previous year). At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy contracted 4.5% (annualized) in 1Q19 (from 10.9% qoq/saar). Final domestic demand decelerated to 1.7% yoy in 1Q19 (from 3.5% in 4Q18). In turn, private demand moderated its growth pace, with private consumption growing to 3.4% yoy in 1Q19, while private gross fixed investment improved to 2.9%. Finally, exports grew 1.6% yoy in 1Q19, while imports decreased 0.5% yoy. For 2019, we expect GDP growth of 3.8%, reflecting an escalation of the US/China trade war. Besides global factors, another downside risk for the economy is a lengthened deceleration of public investment at the subnational and regional levels, as most of the newly elected officials who took office in 2019 lack experience. In turn, we expect an expansionary monetary policy support economic activity, which would offset a lower fiscal impulse.
** Full story
here.

On external accounts, Peru’s current account deficit (CAD) deteriorated slightly in 1Q19, but remained narrow and fully funded by foreign direct investment. Using 4-quarter rolling figures, the current account deficit deteriorated to 1.8% of GDP in 1Q19 (from 1.6% in 4Q18), dragged by a deterioration in the trade balance (2.9% of GDP, from 3.2%), while services balance, net income payments (mainly profits from foreign mining firms) and  remittances remained practically unchanged at 1.1%, 5.2% and 1.4% of GDP, respectively. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (2.8% of GDP in 1Q19).

Regarding the fiscal side, the nominal fiscal deficit improved in 1Q19. Using 4-quarter rolling figures, the nominal fiscal deficit narrowed to 1.7% of GDP in 1Q19 (from 2.3% of GDP in 4Q18) supported by an improvement of fiscal revenues. Looking forward, the Ministry of Finance is now targeting a sharper fiscal consolidation process that would reduce the non-financial public sector (NFPS) nominal deficit to 2.2% of GDP (down from the previous target of 2.7%) in 2019 and 1.8% in 2020 (down from 1.9%). Turning to public debt ratios, gross debt decreased slightly to 25.3% of GDP in 1Q19 (from 25.8% of GDP in 4Q18), while net debt reached 10.6% of GDP (from 11.3% of GDP). Gross Debt ratio complies with Peru’s fiscal rule, which dictates that the gross public debt to GDP cannot exceed 30%.

The Week Ahead in LatAm

Brazil

On economic activity, the highlight will be 1Q19’s GDP, on Thursday. We forecast a 0.2% qoq/sa decline, leading to 0.4% growth in year-over-year terms. From the demand standpoint, we anticipate a small increase in household spending, to be offset by falling investment. On the supply side, we expect a slight increase in services, and contractions in industrial and agricultural GDP. For the second quarter, data released so far remain weak, indicating no significant acceleration after the contraction expected for 1Q19. Additionally, April’s national unemployment rate will come in on Friday, for which we forecast a 12.4% rate (down 0.1 p.p. to 11.9%, seasonally adjusted). Finally, FGV's business confidence surveys for May on construction, industry and services, as well as the economic uncertainty indicator, will be released throughout the week.

External accounts data will also be released. We expect the current account (Mon.) to post a USD 600 million surplus in April, way above the USD 61 million deficit seen in the same month of 2018. This result is driven mostly by a smaller income deficit. Over 12 months, we expect the current account deficit to slide to USD 13.0 bn (stable at 0.7% of the GDP) and the 3-month seasonally adjusted moving average to recede to a USD 15.5 bn deficit. Direct investment in the country will likely amount to USD 6.3 billion in the month, leading the 12-month reading to USD 91 billion (4.9% of GDP)

Additionally, on fiscal accounts, April’s primary budget balance for the central government and the consolidated public sector will be released on Thursday and Friday, respectively.

Finally, the market will remain focused on the news flow about the pension reform in the special committee. Also, throughout the week, some major provisional measures may be voted in the Lower House (MP 868 and 871) and in the Senate (MP 870), which can be indicative of the current situation of the government’s articulation with the Congress, with key implications for the pension reform’s outlook.

Chile

The minutes of May’s monetary policy meeting will be released on Monday. The board of the central bank unanimously chose to leave the policy rate at 3.0% and signaled steady rates ahead. The press release announcing the decision showed some additional caution within the board, likely due to the rising external risks related to the trade dispute between the U.S. and China. The minutes will likely hint that risks are tilted to an even longer-than-anticipated period of stable rates.

The national institute of statistics (INE) releases industrial activity indicators for April on Friday. Industrial production contracted 0.8% yoy in the month of March (-3.5% in February), the third consecutive month of decline. Mining production was the key drag, meanwhile manufacturing was weaker than expected. For April, we expect a milder mining drag, but a higher base of comparison would hamper manufacturing growth (0.2% yoy).

On the same day, INE releases the national unemployment rate for the quarter ended in April. In the first quarter of 2019, the unemployment rate was stable over twelve months at 6.9% as employment growth increased to the highest rate since 2Q18. On a negative note, participation fell for the third consecutive quarter. We expect the unemployment rate to come in at 6.8%, 0.1pp above last year.

Colombia

On Friday, the institute of statistics will release the unemployment rate for April. The labor market showed mixed signals at the start of the year. The national unemployment rate increased to 10.8% in March (from 9.4% one year ago), driven by the 1.4pp rise in the urban rate to 12.0%. Part of the rise in the unemployment rate was the increase in the national participation rate over twelve months, the first annual increase since 2Q17. Additionally, the composition of job growth was favorable, with rising salaried posts. We expect the urban unemployment rate in April to come in at 11.4% (10.7% one year before).

On Friday, the board of the central bank will hold a meeting that focuses on technical aspects other than the policy rate (the second of four scheduled for the year). With the notable depreciation of the Colombian peso and the IMF’s reassurance that Colombia remains eligible for a flexible credit line, some debate on the continuation of put option auctions to accumulate reserves is expected.

We expect the current account balance to be released before the end of the month. As internal demand strengthened and oil prices plummeted at the end of last year, the current account deficit widened sharply in 2018. The USD 3.7 billion deficit in 4Q18 was USD 2.1 billion larger than in 4Q17. The resulting deficit for the year was 3.8% of GDP (3.3% in 2017). We expect a deficit of USD 3.3 billion (up from the USD 2.8 billion deficit in 1Q18), as the trade of goods and service deficit widens

Mexico

INEGI will announce April’s unemployment rate on Tuesday. We expect the unemployment rate to come in at 3.4%. Job growth has moderated, in line with softness in economic activity. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment grew 2.54% year-over-year in April.

In the middle of the week, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (1Q19). In this document, Banxico will provide an update of its macro outlook on the Mexican economy, including updated forecasts for the main variables, and probably more guidance on its future policy decisions.

On Thursday, Mexico’s Central Bank (Banxico) will publish the minutes of May’s monetary policy meeting (held two weeks before), where Board members voted unanimously to leave the policy rate unchanged at 8.25%.The tone of the statement remained hawkish compared to the previous monetary policy decision (March 28). It will be important to see if the deputy governor, Gerardo Esquivel, continues to express a dissident opinion of the policy statement’s tone (in the previous minutes he said that the statement’s tone shouldn’t have been as restrictive).



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