Itaú BBA - Evening Edition – New loans decelerate in Brazil

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Evening Edition – New loans decelerate in Brazil

May 29, 2019

The NPL ratio remained unchanged at 4.7% for consumers and declined to 2.7% for businesses (from 2.8%).

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According to the Central Bank´s credit report for April, new non-earmarked loans for consumers increased 1.1% mom, after growing 2.9% in the previous month. New business loans declined 2.9%, after the 1.5% increase registered in March - all in real terms, seasonally adjusted. The NPL ratio remained unchanged at 4.7% for consumers and declined to 2.7% for businesses (from 2.8%). The average interest rate on consumer loans decreased to 53.6% (from 53.8% in March), while, on business loans, it increased slightly to 19.9% (from 19.8%).
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The central government posted a BRL 6.5 billion primary surplus in April, in between our call (BRL 5.4 bn) and the market’s (BRL 9.1 bn). Compared to our forecast, the expenditure line surprised to the downside in both mandatory and discretionary subcomponents, while net revenue came in line with expectations. In relation to the same month of the previous year, net revenue declined 1.6% in real terms, while total expenses advanced 0.5%. The consolidated primary result for April (including regional governments and state-owned companies) will be released on Friday. We now expect a BRL 4.0 bn surplus.

On activity, business confidence in the service sector decreased 3.1 p.p. to 89.0 in May. The breakdown shows a drop in both the expectations component (-5.1 p.p.) and in the current situation index (-0.9 p.p.). Confidence across all sectors decreased in the month, which indicates no substantial acceleration in economic activity ahead, after a disappointing 1Q19.

Tomorrow’s Agenda: 1Q19’s GDP will published at 9:00 AM. 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. 


Strong adherence to the national strike. The General Confederation of Labor (CGT) protested today against the economic and social policies of the Macri administration. Lack of public transportation and road blockages in some of the main accesses to the city of Buenos Aires were key factors in explaining the high level of absenteeism.



The Central Bank of Mexico (Banxico) published its quarterly inflation report for 1Q19, increasing inflation forecasts for 2019 and 2020. The quarterly average annual headline inflation forecasts for 4Q19 and 4Q20 increased to 3.7% (from 3.4% in the last report) and 3.0% (from 2.7%), respectively, while the quarterly average annual core inflation forecast for 4Q19 and 4Q20 increased to 3.4% (from 3.2%) and 3.0% (from 2.7%). According to the report, changes in inflation forecasts were mainly due to an increase in energy prices and the recent increases in core services prices. As in the statement announcing the most recent monetary policy decision, the balance of risks for inflation is seen as tilted to the upside. The core inflation persistence, driven mainly by core services, remains one of the main upside risks for inflation, which is emphasized with a special analysis in the report. In addition, the board showed concern over internal and external factors pressuring the exchange rate (and, in turn, inflation), the effect of the minimum wage hike in overall wage revisions and a deterioration of public finances. 

The GDP forecast range was lowered to 0.8-1.8% for 2019 (from 1.1-2.1%), while the balance of risk for economic activity remains tilted to the downside. For 2020, the GDP forecast range remained unchanged at 1.7-2.7%. According to the report, the adjustment reflects the weak economic activity in 1Q19 associated to one-off factors. We expect Banxico to deliver two 25-bp rate cuts in the last quarter of 2019. Rate cuts in the short term are unlikely, given that the board still views the balance of risks for inflation tilted to the upside. Looking forward, we believe that with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle, as long as uncertainty abates and risks for inflation fall.
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The central bank’s trader survey reflects the expectation of a slower normalization cycle. The results follow May’s monetary policy decision to unanimously hold rates at 3% and its minutes (released on May 27), which revealed some members deemed the discussion of rate cuts as valid. Stable rates are now expected for the next year, whereas earlier in the month one hike to 3.25% was expected. Meanwhile, only one hike to 3.25% is now anticipated within the two-year horizon (one fewer hike than previously expected). Additionally, the relevant two-year inflation expectation ticked up 0.1pp to the central bank's 3% target. On June 10, the Inflation Report’s release will be a key event on the monetary policy calendar – possible revisions to the structural parameters (lower neutral rate or larger output gap) would play a determinant role in setting the monetary policy path ahead. In 1Q19, the central bank signaled stable rates for most of this year before a gradual hiking process was foreseen during next year. Since then, activity has disappointed and global risks have risen. We expect stable rates at 3% for the remainder of the year. 

Tomorrow’s Agenda: At 11:00 AM, Mexico’s Central Bank (Banxico) will publish the minutes of May’s monetary policy meeting (held two weeks ago), when Board members voted unanimously to leave the policy rate unchanged at 8.25%.

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