Itaú BBA - Evening Edition – Trade balance correction remained sluggish in Colombia  ​​​

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Evening Edition – Trade balance correction remained sluggish in Colombia  ​​​

October 16, 2020

Downbeat domestic demand led to imports shrinking by more than a fourth in August.

Talk of the Day

Colombia

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 151 deaths (165 on the previous day) and 6,823 confirmed cases (from 6,061). The 7-day moving average of deaths remained stable at 161. The total number of deaths now stands at 28,457, with 936,982 confirmed cases, which implies a 3% mortality rate. The estimated reproduction rate (R) is currently at 0.83 (from 0.87).


Downbeat domestic demand led to imports shrinking by more than a fourth in August, yet a weak commodity export performance hinders a swifter external imbalance correction. A trade deficit of USD 828 million was recorded in August, narrowing from the USD 1.4 billion deficit last year. The trade deficit was in line with market consensus and narrower than our USD 950 million deficit expectation. As a result, the rolling 12-month trade deficit sits at USD 10.1 billion, below the cycle peak of USD 11.5 billion as of April and the USD 10.8 billion in 2019. At the margin, the trade deficit is narrower at USD 7.7 billion, annualized, but the pace of the correction has moderated (USD 8.1 billion in 2Q20 and USD 9.6 billion in 1Q20). Imports (FOB) shrunk 27.4% yoy in August, deeper than the 20.8% fall in July, but still an improvement from the 40.8% contraction peak during May. At the margin, we estimate imports recovered to 18% qoq/saar, from a 74% decline recorded in 2Q20, as consumer and capital imports post some improvement. Exports shrunk 21.3% yoy in August (similar to the fall in July). Oil exports dropped 38.9% yoy (-50.9% in July) while coal exports contracted 25.9% (-34.1% in July). At the margin, exports grew 79.4% qoq/saar (-78.8% in 2Q20). We expect a gradual narrowing of the current account deficit from 4.3% last year to 3.3% of GDP in 2020. Low terms-of-trade and still weak global activity mean Colombia’s external imbalances would persist. Still, weakened internal demand and COP depreciation would aid some correction of the current account deficit. **Full story here.

According to the central bank’s monthly analyst survey, short-term inflation expectations edged up following the September surprise, while the medium-term outlook remains broadly anchored. Meanwhile, a deeper activity decline likely supports rates at 1.75% for the next twelve months. Inflation expectations for 2020 increased to 1.92%, from 1.73% previously (Itaú: 2.0%). The one-year inflation outlook moved to 2.8% (2.73% in September), while the two-year inflation expectation was steady at 3.06%. Similarly, yearend core inflation (excluding food prices) advanced to 1.39% (1.28% in September) and the one-year expectation raised 17 bps to 2.67%, while two-year outlook was stable at 3.0%. On the activity front, GDP is expected to contract 8.7% yoy in 3Q20 and 5% in 4Q20. This would result in a drop of close to 7% for the full year, deteriorating from the 5.3% expected in July (Itaú: -6.0% with risks tilted to a deeper decline). A 4.3% recovery is seen for next year (up from 3.1% seen in July; Itaú: 4.5%). With short-term inflationary pressures being revised up, but growth down, the policy rate is expected to stay at 1.75% for the remainder of the year and for most of 2021 (2% previously, before the surprise cut last month). A gradual normalization process from the backend of 2021 sees the rate reaching 3.25% in the two-year horizon (no significant change from September). We also expect rates to remain at 1.75% for a similar time period but would not rule out additional easing in the event of a slower-than anticipated activity recovery and/or containment of inflation risks (such as those stemming from potential capital outflows and the subsequent impact on the exchange rate).

Brazil

Itaú Daily Activity Tracker: Our Daily Activity Tracker decreased by 2.0 p.p., to 98.1 (latest available data from Sunday, October 11th). The 7-day moving average decreased slightly, by 0.2 p.p., to 98.3. The indicator is up 41.5 p.p. from the bottom seen on April 11th, and is now 1.9% below the mid-March level, when the series started. See our report here.

Argentina

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 421 deaths (349 on the previous day) and 17,096 confirmed cases (from 14,932). The 7-day moving average of deaths decreased to 376, from 385 on the previous day. The total number of deaths now stands at 25,342, with 949,050 confirmed cases, which implies a 2.7% mortality rate. The estimated reproduction rate (R) is currently at 1.17 (from 0.97).


Chile

COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 95 deaths (19 on the previous day) and 1,694 confirmed cases (from 1,124). The 7-day moving average of deaths increased to 44, from 38 on the previous day. The total number of deaths now stands at 13,529, with 488,190 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 0.83 (from 0.75).

Mexico

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 387 deaths (478 on the previous day) and 5,514 confirmed cases (from 4,056). The 7-day moving average of deaths increased to 313, from 310 on the previous day. The total number of deaths now stands at 85,285, with 834,910 confirmed cases, which implies a 10.2% mortality rate. The estimated reproduction rate (R) is currently at 0.75 (from 0.64).


Peru

COVID-19 update: the latest official information from the Ministry of Health is that Peru registered a daily increase of 65 deaths (93 on the previous day) and 2,789 confirmed cases (from 2,977). The 7-day moving average of deaths decreased to 68, from 72 on the previous day. The total number of deaths now stands at 33,577, with 859,740 confirmed cases, which implies a 3.9% mortality rate. The estimated reproduction rate (R) is currently at 0.95 (from 0.83).


The Week Ahead in LatAm

Argentina

On Tuesday, the fiscal balance for September will be published. We estimate that the 12-month rolling primary deficit as of August stood at 5.1% of GDP, up from 4.8% in July. We forecast a fiscal deficit of 6.9% of GDP in 2020, up from 0.4% of GDP in 2019, due to the measures announced to control the spread of the COVID-19 pandemic, amid a large GDP contraction.

The EMAE (official monthly GDP proxy) for August will be published on Thursday. Leading and coincident indicators showed worrisome signs in August. The official manufacturing index fell 0.9% mom/sa and the construction output decreased 1.0% mom/sa. We forecast a 0.5% mom/sa increase, but a 13.0% year-over-year drop.

The trade balance for September will come out also on Thursday. We forecast a surplus of USD 1.5 billion (down from USD 1.7 billion surplus registered in September 2019) amid falling exports and imports on a year-over-year basis. If our forecast is correct, the trade surplus accumulated over 12 months will be USD 19.0 billion, slightly down from USD 19.2 billion in August.

Brazil

On the activity side, FGV will release the second preview of the industrial sector confidence survey for October (Wednesday), as well as the consumer confidence survey (Friday). The first preview pointed to a slight decline in the aggregate business confidence index (-1.1 p.p.), but still remaining above the pre-crisis level. The industrial sector posted the only relevant increase (+5.4 p.p.) in the month. On the other hand, consumer confidence index decreased in October (-3.9 p.p.), and so did the retail (-5.1 p.p.) and services (-1.4 p.p.) confidence indicators. The construction sector confidence level remained virtually stable (+0.1 p.p.). According to these numbers, the industrial index registered the strongest recovery so far (now at 10% above the pre-Covid levels), followed by construction (-1.3%), retail (-5.3%) and services (-8.4%) sectors. The consumer confidence is the one that recovered the least, being 9.5% below February’s level.

Regarding inflation figures, October’s IPCA-15 will be released on Friday. We forecast a 0.90% monthly increase, leading the 12-month reading to 3.48% (from 2.65% in September). Non-core inflation is likely to pressure upwards, specially food-at-home (+45 bps) and airline ticket (+17 bps) prices.

On external accounts, we expect the current account (Friday) to post a USD 2.5 billion surplus in September, well above the USD 2.7 billion deficit registered in the same month of 2019 and the sixth monthly positive result in a row. As in the previous month, we expect the service deficit (widespread across international travel, transport and equipment rental items) and the profit and dividend deficit to drop sharply. Additionally, the trade balance will likely continue to improve, as exports remain at high levels, but imports have decreased considerably. The current account deficit over 12 months is likely to recede to USD 20 billion (1.3% of GDP), with the 3MMA SAAR reaching a USD 32 billion surplus. Direct investment in the country (DIC) will likely reach USD 2.1 billion in the period, with the DIC over 12 months decreasing to USD 51 billion, below the observed levels in last few months.

On the political front, as we approach the municipal elections, congressional activity is set to remain slow, at least in regard to discussions on the fiscal accounts. Finally, the COVID-19 outbreak will continue on focus – recent numbers show that the gradual declining trend (both for new deaths and cases) continues, and concerns that the recent improvement was driven by some holiday-related distortions were unjustified so far.

Colombia
 
On Wednesday, think-tank Fedesarrollo will publish the business confidence indicators for the month of September. Industrial and retail confidence continued to recover in August. Industrial confidence returned to optimistic ground for the first time since February. At +1.5% (0 = neutral), industrial confidence remained well below the +10.5% posted last year, despite improving significantly from the -35.8% cycle trough in April (-8.5% in July). Meanwhile, retail confidence moved further into optimistic territory, recording +13.8%, versus +7.1% in July and the cycle low of -30.8% in March. Nevertheless, retail confidence is still below the +29.1% recorded in August 2019. With the mandatory quarantine being fully lifted in September, some sentiment recovery is likely to continue.

On Thursday, the monthly coincident activity indicator (ISE) will be released. Activity indicators disappointed in the month. Retail sales contracted 17.1% yoy in August (-12.4% previously). The retail slump came amid the absence of a VAT-free sales day in the month, and despite encouraging labor market data along with decreasing interest rates as expansionary monetary policy is transmitted to lending rates. Despite manufacturing sentiment bouncing back to optimistic ground in the month, manufacturing contracted 10.3% yoy in August (8.5% drop in July). Overall, we expect the activity indicator (ISE) to contract 12.5% in August (9.6% decline in July), in line with a sluggish activity recovery in 2H20.

Mexico

In the middle of the week, INEGI will announce September’s unemployment rate. We expect the unemployment rate to post 5.4% reflecting the slow recovery in the labor market. Weakness in labor market is also reflected in formal job creation, which stood at -4.2% yoy in the same month.

On Thursday, INEGI will publish the inflation figure for the first half of October. We expect bi-weekly CPI to increase 0.52% (from 0.40% a year ago), while core inflation stood at 0.14% (from 0.13% a year ago). We expect the headline inflation figure to reflect upside pressure from the seasonal removal of the subsidy to electricity tariffs and from non-core agro prices. Assuming our forecast is correct, headline and core CPI would post 4.06% yoy (from 3.93% in the second half of September) and 4.00% (from 3.99%), respectively.

Ending the week, the statistics institute (INEGI) will announce August’s retail sales, which we expect to fall by 9.1% yoy (from -12.5% in July), reflecting the easing of distancing measures. We already know coincident consumption indicator ANTAD same-store-sales recovered further in August (-3.0% yoy, from -9.1% in July).

Paraguay

The monetary policy meeting is scheduled for Thursday. The central bank kept the reference rate unchanged at 0.75% in its previous meeting, citing low inflation and better activity. We do not expect changes in the monetary policy rate.



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