Itaú BBA - Evening Edition – Weaker-than-expected GDP in Mexico

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Evening Edition – Weaker-than-expected GDP in Mexico

February 25, 2019

We expect economic activity to slow to 1.7% this year, with risks tilted to the downside

Talk of the Day


GDP weakened in 4Q18, dragged by the industrial sector. Mexico’s monthly GDP proxy (IGAE) expanded 0.04% yoy in December (from 1.8% in November), below our forecast (0.8%) and median market expectations (0.4%) – which implied a GDP growth of 1.7% yoy in the 4Q18 (revised down from the 1.8% flash estimate, announced by the Statistics Institute three weeks ago, and from 2.5% in the 3Q18) and a growth rate of 2.0% in 2018. 

At the margin, GDP also decelerated. Seasonally-adjusted GDP grew 1.0% (annualized) in the 4Q18 (from 2.4% in the 3Q18). Looking at the breakdown, with qoq/saar figures, primary sector grew to 9.3% in the 4Q18 (from 5.5% in the 3Q18), while services sector accelerated slightly (2.8%, from 2.6%). In contrast, industrial sector, decreased 4.7% qoq/saar in the 4Q18 (from 0.6% in the 3Q18), with mining decreasing 15.2% (from -8.4% in the 3Q18), while manufacturing sector decreased 0.6% (from 2.7%). Importantly, GDP excluding primary sectors and mining output decelerated to 1.6% qoq/saar in the 4Q18 (from 2.9% in the 3Q18).

We expect economic activity to slow to 1.7% this year, with risks tilted to the downside. Uncertainty over the new administration’s policy direction and over the approval of the renegotiated NAFTA by the U.S. Congress will continue to weigh on investment. Deceleration in the U.S. economy will also curb export growth. Moreover, fall in oil output is also a downside risk to economic activity and labor market data suggests consumption will also contribute less to growth.

On external accounts, the current account deficit (CAD) remained narrow in 2018. The CAD came in at USD 3.4 billion in 4Q18 – narrower than median market expectations (a deficit of USD 4.1 billion), taking the 2018 current account deficit to 1.8% of GDP (from a deficit 1.7% of GDP in 2017). The 4Q18 current account deficit was the result of a deterioration of the trade balance (a deficit of USD 3.5 billion, from a deficit of USD 1.9 billion in 4Q17), a slightly improvement in the services balance (a deficit USD 1.7 billion in the 4Q18, from a deficit of  USD 1.9 billion in the 4Q17), while net income stood at  USD -6.8 billion in the 4Q18 (compared to USD -6.0 billion in the 4Q17) and secondary income (mainly remittances from the US) improved somewhat, to USD 8.6 billion in 4Q18 (from USD 7.9 billion in 4Q17). At the margin, our seasonally-adjusted measure of the CAD in 4Q18 remained practically unchanged from the previous quarter, at a deficit of 1.8% of GDP. 

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 4Q18 already shows more difficult financing conditions (as direct investment and portfolio inflows from foreigners were weak), even though the level of net direct investment remains adequate to fully finance the external deficit. 

Tomorrow’s agenda: At 11:00 AM, the statistics institute (INEGI) will announce December’s retail sales. We estimate a growth of 3.3% yoy, from 3.4% in November. 


The current account posted a $6.5 billion deficit in January, printing close to market consensus (-$6.4 billion). Notwithstanding the latest reading, the current account deficit remains at a historically-low level. For the next years, we maintain our expectation of a gradual increase in the current account deficit, but not to the point of compromising the sustainability of Brazil’s external accounts. Direct investment in the country is still the main source of financing for the current account deficit.
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On the activity perspective, FGV has released its monthly construction survey. Confidence fell 0.5% mom/sa in February, after being stable in January and rising for 5 consecutive months before. The small decline came from weaker current conditions (-0.9%), while expectations rose 0.1% over the same period. Capacity utilization rose 0.3pp to 67.0, reaching the highest level since Feb 16.

Finally, according to the central bank’s survey with market participants (Focus), the IPCA inflation expectations declined to 3.85% for 2019 (from 3.87%), while it has remained flat at 4.00% for 2020 and at 3.75% for 2021. The median of GDP growth expectations increased 7 bps to 2.65% for 2020. For 2019 and 2021, the GDP growth expectations remained flat at 2.48% and 2.50%, respectively.

The year-end Selic rate expectations also remained flat at 6.50% for 2019 and at 8.0% for 2020 and 2021. The median of the forecasts for the exchange rate did not change for the three years horizon (2019-2021): at BRL 3.70/USD for 2019; at BRL 3.75/USD for 2020; at BRL 3.80/USD for 2021.

Macro Vision: Our latest study simulates how Brazil’s would benefit in terms of per capita income if the nation achieved a greater performance in the Doing Business rank, as intended by the government, in dimensions in which the Brazilian economy currently is significantly weaker. In a simple comparison with other countries, we found that even modest competitiveness gains could lead to significant increases in income. This exercise also allowed us to identify priorities in a reform agenda that seeks to improve the business environment in Brazil: simplifying the tax system, cutting red tape, improving credit market regulations and opening up the economy.
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Tomorrow’s agenda: FGV’s commerce and industrial confidence surveys will be released at 8:00 AM. The confirmation hearing for Roberto Campos Neto nomination as the Central Bank governor, in the Senate, is scheduled for 10:00 AM. The Central Bank credit report for January is expected to be released during the day.


Fitch confirmed Chile’s rating of ‘A’, with a Stable outlook. Fitch has kept Chile’s rating stable since the one notch downgrade implemented in August 2017. Despite Moody’s one notch downgrade of Chile in 2H18, both its and S&P’s ratings remain one notch higher at “A+”, also with a stable outlook.

Risks to the outlook include global trade tensions or slower Chinese growth that could weigh on copper prices and confidence. Meanwhile, the administration's growth-oriented reform agenda could be positive if advancements are achieved. Fitch believes a negative rating action could be triggered by sustained growth under-performance leading to divergence in per capita income with the 'A' category median (growth of 4% last year and 3.2% seen for this year are in line with its peers); Marked increases in the government debt burden and/or erosion of fiscal credibility; Emergence of external liquidity constraints or growth in external indebtedness that increase vulnerability to shocks (Fitch sees Chile’s CAD higher than its peers, while private external debt is high, but largely hedged FX positions help mitigate risks).

The speed of Chile’s debt increase in previous years, rather than its level, had led to lower credit ratings by all main agencies. With the government focusing on stabilizing the debt-to-GDP ratio this year (Fitch expects stabilization next year at 28% from near 26% last year) and given that the debt level for Chile remains low compared with peers (45%), rating agencies will likely remain at bay for the time being. We see the nominal fiscal deficit broadly stable for the year at a low 1.7% of GDP. However, Fitch sees the nominal deficit ticking up to 2%, given the absence of the extraordinary revenues seen last year, softer copper prices observed so far in 2019, and higher budget expenditure execution.

Fixed Income Strategy

ALL LATAM: Progress on the U.S. and China trade negotiations provide a positive environment for emerging markets at the start of the week. Trump said that given “substantial progress” on issues including intellectual property and technology transfer, he will delay U.S. tariff increases scheduled for March 1. In addition Trump explained that “assuming both sides make additional progress, we will be planning a Summit for President Xi and myself at Mar-a-Lago to conclude an agreement”.

CHILE, COLOMBIA: We continue to pay the 1-year local rate in Chile and receive the 1-year local rate in Colombia. Rates at the very front-end widened slightly in Chile and remained stable in Colombia last week, further benefitting our recommendation (now with a 10bps gain). Market prices sill imply around 58bps in hikes in Colombia until year-end and 26bps in Chile. We continue to believe that the spread between Colombian and Chilean 1-year rates will continue declining.

BRAZIL: We have no position in local rates today, amid uncertainties towards the pension reform discussion and because we expect no rate cuts in the short term. Rates widened around 7bps at the belly and 15bps at the long-end last week.

The confirmation hearing of incoming BCB governor Roberto Campos Neto in the Senate, as well as directors Bruno Serra and João Manoel Pinho de Mello, is scheduled for Tuesday. The hearing will be an important driver for the front-end and belly of the curve, as the market has been discussing the possibility of further rate cuts. We believe the policy indications in the hearing will likely be consistent with recent official communication by the Copom, and do not expect clear indications of rate cuts for the time being.
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