Itaú BBA - Evening Edition – Monthly GDP proxy deteriorates in Mexico

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Evening Edition – Monthly GDP proxy deteriorates in Mexico

June 26, 2020

In all, April figures put a downside risk to our 8.5% GDP contraction forecast for 2020

Talk of the Day
 

Mexico

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 736 deaths (947 in the day before) and 6,104 confirmed cases (from 5,437 in the day before). The total number of deaths now stands at 25,060, with 202,951 confirmed cases, which implies a 12.3% mortality rate. The estimated reproduction rate (R) is now at 1.3 (from 1.2). 

The monthly GDP proxy (IGAE) fell by 19.9% yoy in April (from -2.3% in March), weaker than our forecast of -17.5% and above market expectations of -22.0%. According to calendar adjusted figures, the monthly GDP contracted at a similar pace, taking the annual quarterly rate to -8.0% in April (from -1.7% March). Looking at the breakdown, also using calendar adjusted figures, the annual quarterly rate of the industrial sector deteriorated to a contraction of 12.6% (from -3.4%), with construction and manufacturing output receding by 18.1% and 14.8%, respectively. Likewise, the quarterly annual rate of services sector deteriorated to -6.3% in April (from -1.0% in March). In all, April figures put a downside risk to our 8.5% GDP contraction forecast for 2020. While we expect a recovery during the second half of the year as social distancing measures are lifted, a modest fiscal stimulus and prevailing uncertainties over the direction of domestic policy will curb the growth pace. **Full story here.

The monthly trade balance posted a deficit of USD 3.5 billion in May, below our forecast of USD 1.9 billion surplus and market expectations (USD 1.3 billion surplus) – taking the 12-month rolling trade balance to a surplus of USD 1.8 billion in May (from a surplus of USD 6.3 billion in April). Looking at the breakdown, also using 12-month rolling figures, the energy trade deficit improved to USD 19.8 billion in May (compared to a deficit of USD 21.4 billion in April), while the non-energy balance deteriorated to a surplus of USD 21.7 billion (from a surplus of USD 27.7 billion). At the margin, using 3-month annualized seasonally adjusted figures, the trade balance stood at a deficit of USD 26.5 billion in May (from a deficit of USD 4.9 billion in April), with the energy trade balance posting a deficit of USD 15.3 billion (from a deficit of USD 20.9 billion), while the non-energy trade balance deteriorated to a deficit of USD 11.2 billion (from a surplus of USD 16.0 billion). We expect exports to recover faster than imports as social distancing measures are lifted due to a better performance of domestic demand in the U.S. relative to Mexico, meaning the recent deterioration of trade balance is seen by us as temporary. The weaker Mexican peso will also help to improve external accounts. **Full story here.

Colombia

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 163 deaths (87 in the day before) and 3,486 confirmed cases (from 3,541 in the day before). The 7-day moving average of deaths increased to 101, from 90 in the day before. The total number of deaths now stands at 3,486, with 80,599 confirmed cases, which implies a 3.3% mortality rate. The estimated reproduction rate (R) is now at 1.31 (from 1.24). 

Earlier this month, fiscal authorities successfully requested a suspension of the fiscal rule for this year and the next, increasing the room for the fiscal response to the economic crisis. The committee had already raised the fiscal deficit limit twice since the Covid-19 outbreak hit Colombia earlier this year. But even with the last revision to 6.1% of GDP (2.2% in February), the fiscal space allowed for 2020 was deemed insufficient by the government considering the impact on revenue from a slump in economic activity and the need for more spending to address the crisis. The release of the Medium-Term Fiscal Plan (MTFP) ahead of the 2021 budget discussion points to a fiscal deficit this year of 8.2% of GDP (2.5% last year), with a narrowing to 5.1% in 2021. For 2022, the fiscal authorities envision a further narrowing to 2.5% of GDP, while retaining a 1% deficit as the medium-term target. However, the narrowing considers the assumption of a structural tax reform of 2% of GDP. Considering that 2022 is an electoral year, the likelihood that an unpopular procedure gains sufficient political support appears highly unlikely.

The economic contraction this year is anticipated to be 5.5%, closer to our expectations than to the updated IMF outlook (7.8% fall). Overall, the impact of the shock on revenue and extra spending is estimated at 6% of GDP. As a result, gross debt is seen increasing by some 15pp this year to reach 65.6% of GDP. For 2021, the government anticipates a meaningful activity bounce back (6.6% yoy; Itaú: 4.5%; IMF: 4%), taking the GDP level back to 2019 levels. The recovery of fiscal revenue collection, reduced emergency spending, and currency appreciation underline the expectation that gross debt falls to 60.5%. Based on the assumption of primary surpluses, a further downward trajectory for debt is outlined, reaching 43% of GDP by 2031.

To prevent the loss of its investment grade rating, Colombia would likely need to recoup economic growth, above the 3.2% potential for some years to close the output gap, and implement structural tax reforms. Relative to its peers, authorities see room to raise current revenue sources by at least 2pp and areas where expenditure could be reduced. While rating authorities previously noted the suspension of the fiscal rule as not surprising, and unlikely to play a role in rating decisions, they remained vigilant on the debt stabilization plan. Fitch Ratings has noted that, due to the current situation that generated an increase in government debt, Colombia could lose its investment grade rating if it does not have a specific fiscal adjustment plan for the short and medium term. Overall, the agency acknowledged that the negative outlook it currently holds on the BBB- rating indicates a 50% change of a downgrade ahead. S&P earlier this year altered its outlook to negative (BBB-). While the expectation of a swift recovery would bring short-term fiscal relief, a tough fiscal consolidation program is needed ahead. Overall, the risk of Colombia losing its investment grade rating going forward is non-negligible.

Brazil

COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 990 deaths (1,141 in the day before) and 46,860 confirmed cases (from 39,483 in the day before). The 7-day moving average of deaths receded to 1,001, from 1,032 in the day before. The total number of deaths now stands at 55,961, with 1,274,974 confirmed cases, which implies a 4.4% mortality rate. The estimated reproduction rate (R) is now at 1.17 (from 1.24).

The Brazilian Central Bank released today the credit figures for May. The decline in new non-earmarked loans eased to 2.2% mom/sa in real terms, from -18.9% in April. New earmarked loans advanced 3.9% using the same metric (from 9.7% in April). Overall delinquency slid 0.1 p.p. to 3.1% in seasonally adjusted terms. The average interest rate and spread also decreased. **Full story here.

Last night, president Bolsonaro affirmed that the government will extend the emergency aid (the so-called “coronavoucher”) for three more months. According to the president, the administration plans to gradually reduce the value of the benefit (currently at BRL 600) during this three-month period, first to BRL 500, and then to BRL 400 and BRL 300. It’s worth mentioning that to obtain this reduction, the government must be authorized by the two legislative houses, which, according to local news, prefer rather to extend the benefit for two more months, but maintaining its current value. In both scenarios, the fiscal impact of the benefit extension would be of some BRL 80 billion, according to our estimates.

According to FGV’s monthly survey, retail confidence advanced 17.0 p.p. in June (to 84.4), after increasing 6.2 p.p. in May. This result was in line with that from the special survey conducted by FGV two weeks ago, where the retail confidence pointed to a 17.2 p.p. gain. The breakdown shows that the expectations component increased 20.6 p.p. (to 87.5), while the current conditions component went up by 12.7 p.p., to 82.0. It’s worth mentioning that the industrial (preview), consumer, and construction confidence indicators, released earlier this week, also improved in the month by 15.2 p.p., 9.0 p.p. and 9.1 p.p., respectively.

Itaú Daily Activity Tracker: Our indicator increased by 4.2 p.p., to 84 (on Monday June 23rd, the latest available data). The 7-day moving average is broadly stable at 82. The indicator is up 52% from the bottom seen on March 28th, and is now 16% below the mid-March level, when the series started. See our report here.

Paraguay

GDP expanded by 3.5% yoy in 1Q20, before the COVID-19 outbreak, marking a third consecutive expansion, but missed the 3.8% yoy growth suggested by the monthly GDP proxy. On sequential basis, GDP fell by 0.4% against 4Q19. We expect a sharp decline in activity in 2Q20 due to COVID-19-related social distancing measures. With a gradual recovery in activity in 2H20, we forecast a -2.6% GDP growth for 2020. 

Uruguay 

The monetary policy committee sees positive signs for activity. According to its latest statement, the central bank projects a smaller contraction than originally expected due to the measures taken to preserve liquidity during lockdowns. On a positive note, the central mentioned a downtrend in non-tradable prices. Consumer prices have risen by 11.05% over the last 12 months through May, compared with a 3%-7% target range. Inflation expectations for the next 24 months stand at 8%. The COPOM set a growth target range of 7%-10% yoy for the monetary aggregate M1’ (currency plus sight deposits including saving accounts) to ensure that liquidity is not constrained. Demand for money increased by 11% yoy in the previous quarter, surpassing the upwardly revised target of 7.5%. The central bank expects to adjust the monetary expansion to the inflation target as economic activity recovers.  We forecast a GDP contraction of 3.6% and inflation of 10.5% for this year. We expect a significant sequential contraction in 2Q20, followed by a gradual recovery in 2H20. The construction works necessary for the start-up of the new UPM pulp mill will help limit the decline in activity. 

Argentina

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 43 deaths (39 in the day before) and 2,606 confirmed cases (2,635 in the day before). The 7-day moving average advanced to 30 deaths, from 28 in the day before. The total number of deaths now stands at 1,167, with 52,457 confirmed cases, which implies a 2.2% mortality rate. The estimated reproduction rate (R) is now at 1.5 (from 1.6).

Chile

COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 165 deaths (172 in the day before) and 3,649 confirmed cases (from 4,648 in the day before). The 7-day moving average of deaths receded to 139, from 152 in the day before. The total number of deaths now stands at 5,068, with 263,360 confirmed cases, which implies a 1.9% mortality rate. The estimated reproduction rate (R) is now at 0.77 (from 0.76).

Peru

COVID-19 update: according to the Johns Hopkins University, Peru registered a daily increase of 178 deaths (175 in the day before) and 3,762 confirmed cases (from 3,913 in the day before). The total number of deaths now stands at 8,939, with 272,364 confirmed cases, which implies a 3.2% mortality rate. The estimated reproduction rate (R) is now at 1.0 (from 0.9). 

The Week Ahead in LatAm

Argentina

The INDEC will publish the EMAE (official monthly GDP proxy) for April on Monday. Leading and coincident indicators showed a significant drop for the month due to the full impact of social distance measures. The manufacturing index fell 18.4% mom/sa, while construction output plummeted 51.6% mom/sa. We forecast a 9.0% mom/sa decline, leading to a 19.7% year-over-year drop in April. 

The INDEC will release the current account balance for 1Q20 on Tuesday. The current account posted a USD 3.0 billion surplus in 4Q19, up from USD 2.0 billion deficit in 4Q18. We forecast a surplus of USD 70 million in 1Q20 (-USD 3.5 billion in 1Q19) due of a weaker peso and lower internal demand.   

On Friday, the central bank will release its monthly expectations survey. In the previous survey, analysts reduced their inflation forecast for 2020 to 43.3% (median value) from 44.4%, while the forecast for 2021 increased to 41.2% from 40.0% before. In the previous survey, pundits reduced their GDP growth forecasts for 2020 to -9.5% from -7.0% before. 

Brazil

In the next week, the main economic releases will come from the activity front. On Monday, formal job creation (CAGED) figures for May will come out. We expect a net destruction of 700 thousand formal jobs (745k, in seasonally adjusted terms), building on the 1.1 million jobs destruction accumulated between March (-241k) and April (-860k). Still on the labor market, IBGE will release (Tue.) May’s unemployment rate, which we expect to reach 12.3% (12% in seasonally-adjusted terms), virtually stable compared to April, due to a likely drop in the participation rate from 59% to 57%. Considering the participation rate of February, our unemployment rate forecast would stand around 19%. Our estimate is based on the data from the “PNAD COVID-19” survey of May. On Friday, the IBGE will release May’s industrial production, for which we currently forecast a 9.6 mom/sa growth (-20.2% yoy), after a 18.8% plunge in April (there are still coincident data to be released, which may change our estimate). Other than that, the vehicle sales figures (Fenabrave) for June will likely be released throughout the week (without specific date). Finally, FGV will release June’s business confidence surveys on the industrial (Mon.) and services (Tue.) sectors, as well as the aggregate business confidence (Wed.).

On external accounts, June’s trade balance will be released on Wednesday. We expect a USD 6.8 billion surplus, above the USD 5.7 billion surplus posted in the same period of 2019. While exports will likely fall by 4.0% mom/sa, imports are set to decline by 22.3%. This sharp decline in the monthly reading, is explained by the purchase of an oil platform in May, which strongly increased imports figures in the month. Excluding this purchase, imports would recede by 2.9% mom/sa, continuing in a low level due to the weak economic activity. The trade balance is set to remain on positive terrain, with the 3mma SAAR reaching USD 56 bn and the accumulated in 12 months at USD 43 bn.

Regarding fiscal accounts, May’s central government’s balance will be released on Monday, for which we forecast a BRL 133.3 bn deficit. In the following day, the consolidated public accounts, also for May, will be published, for which we expect to reach a BRL 132.8 bn deficit in the month.

Finally, the evolution of the coronavirus outbreak and resulting policy measures, such as potential announcements by regional governments regarding isolation rules, will continue in the spotlight. On the political front, the discussions on the extension of the emergency aid (the so-called “coronavoucher”), are set to grab all the attention. President Bolsonaro has indicated that the administration plans to extend the benefit for three months, but gradually reduce its value (currently at BRL 600) to BRL 500 in the first additional month, then to BRL 400 and BRL 300 in the following two. To obtain this reduction, the government must be authorized by the two legislative houses, which, according to local news, prefer to simply extend the benefit for two more months, but maintaining its current value. In both scenarios, the fiscal impact of the benefit extension would be of some BRL 80 billion, according to our estimates.

Chile

On Tuesday, the central bank will release the results of the financial traders’ survey. At the start of June, traders adjusted inflation expectation down by a further 10bps for the one-year outlook to 1.90%, while holding the view that the policy rate would stay at 0.5% for at least the next year. One likely edit this month could be the expectation that the policy rate remains at 0.5% for the full two-year horizon following the updated forward guidance from the central bank. 

The national institute of statistics (INE) releases activity indicators for May on Tuesday. With the social distancing measures consolidating in the month of April, activity weakened significantly. Retail sales contracted 31.3% yoy (14.8% drop previously), meanwhile, as lockdown restrictions left manufacturing zones broadly untouched, manufacturing declined a milder 5.9% (+0.6% previously). For May, electricity generation declined 2.6% yoy (from a 0.2% drop in April), hinting at a deeper manufacturing fall of 12%. Meanwhile, with car sales falling 72% yoy in the month (in line with the previous month) and consumer confidence around historic lows, the retail sales drop would be 35%.

On the same day, INE releases the national unemployment rate for the quarter ending in May. In the quarter ended in April, the unemployment rate rose 1.9pp over twelve months to reach 9.0%. While the unemployment rate rose, the main takeaway from the April data was the significant number of job losses (680k; -7.6% yoy). With the coronavirus shock to the economy consolidating, we expect further labor market loosening. We expect an unemployment rate of 9.7% (2.5pp up from last year), with unfavorable dynamics persisting.

On Wednesday, the central bank will publish the GDP proxy (Imacec) for May. Activity shrunk 14.1% yoy in April as the economy felt the effects of social distancing and lockdown measures underway. Mining posted a mild contraction of 0.1% (+2.0% in March), as this sector has been less affected by social distancing measures. Meanwhile, non-mining activity contracted 15.5% yoy (3.6% fall in March), dragged by services, commerce and to a lesser extend construction and manufacturing. With the measures implemented to face the coronavirus consolidating in May, activity is set to remain significantly lackluster. We expect the monthly GDP proxy to contract 3% from April, leading to a 15.5% annual fall. 

The central bank will release the minutes of the June monetary policy decision on Thursday. The policy rate was expectedly left at its technical floor of 0.5% but the updated forward guidance extended the outlook for stable rates through the entire policy horizon (two years), while the liquidity and QE measures were expanded. Given the flagship quarterly IPoM was also released last month, a shortened edition of the minutes is expected, consolidating the key messages already outlined.

Think-tank Icare’s June business confidence will come next week. ICARE'S business confidence index dropped 16.3pp over twelve months, coming in at 34.3 in May (31.7 previously; 50 = neutral). All sub-indexes deteriorated in the month, with all but mining staying below neutral levels. No significant improvement is expected in business confidence, as activity remains weak and the health outlook uncertain. 

Colombia

On Tuesday, the institute of statistics will release the unemployment rate for May. The labor market loosened significantly in April as the deteriorated economic outlook and social distancing measures filtered through to job losses. The national unemployment rate came in at 19.8% in the month of April, up 9.5pp over twelve months, even with a notable 10.4pp drop in the participation rate (to 51.8%). The urban unemployment rate came in at a higher 23.5% (11.1% one year ago), as employment shrunk 28% yoy. For May, we expect the urban unemployment rate to rise to 22.5%, 11.3pp up from last year.

On the same day, the central bank holds its monetary policy meeting at which we expect another 50bp rate cut in a split decision. Last month the board decided by majority to lower the policy rate by 50bps for a third consecutive time to 2.75%. The dissidents (two of seven members) preferred a more gradual approach amid capital flight concerns. Governor Juan Jose Echavarria has noted that real rates are already negative and board member Maiguashca added that a real rate of zero is not particularly a floor, rather a psychological barrier. The June analyst survey showed yearend inflation expectations falling 80bps to 2.20%, while the one-year inflation expectation dropped 20bps to 2.89%, partly offsetting the impulse from the last cut. Such a development, along with the brutal drop in output and the sharp labor market loosening, leads us to expect the board will continue easing monetary policy at the same pace. The minutes of the meeting will be released the following day. 

On Friday, the national statistics agency will release export data for the month of May. Colombian exports recorded the sharpest historical decline in April, dragged down by coal and oil sales. Total exports contracted 52.3% yoy, led by the 78.6% drop of oil exports, while coal sales dropped 47.7%. For May, we expect commodity exports to show similar dynamics and contract sharply from last year. Total exports would likely come in at USD 2.2 billion, moderating the annual drop to 42.3% on the back of some milder commodity export declines.

On Saturday, the Colombian national institute of statistics (DANE) will release the inflation print for June. In May, consumer prices retreated 0.32% from April, well below last year’s 0.31% gain, as slumping domestic demand along with measures from authorities (subsidies and tax exemptions) are driving the inflationary pressure decline. The price evolvement was the lowest May reading in more than a decade. Annual inflation fell from 3.51% in April to 2.85%, sitting below the central bank’s 3.0% target for the first time since September 2014. We expect consumer prices to fall 0.25% from May (+0.26% last year), pulled down by apparel, fuels and hospitality services. Annual inflation would fall further to 2.33%.

Paraguay                                                               

The central bank will publish the CPI inflation for June on Thursday. Inflation has been well behaved and has remained below the center of the target range (4%+-2%) since November 2018. We forecast 0.0% mom inflation for June, bringing the annual figure to 0.8% from 0.7% in May.   

Peru

The statistics institute (INEI) will announce June’s CPI inflation in the middle of the week, which we forecast at -0.35% month-over-month. We expect the widening of slack conditions to put downward pressure on inflation. Assuming our forecast is correct, annual headline inflation would post 1.51% year-over-year in June (from 1.78% in May).

Uruguay

The consumer prices index for June will see the light on Friday. Inflation reached 0.6% mom in May mostly due to the increase in food items (including seasonal products), bringing the annual reading to 11.05%. We forecast 0.5% mom inflation for June (10.9% yoy).



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