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Fitch reaffirms Chile as ‘A’ rating and stable outlook

February 25, 2019

Fitch has kept Chile’s rating stable since the one notch downgrade implemented in August 2017

Talk of 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.


CPI was significantly below market expectations, dragged mainly by non-core food index. Mexico’s CPI posted a bi-weekly rate of -0.10% in the first half of February (from 0.21% a year ago), below our forecast (0.01%) and median market expectations (0.04%).

On an annual basis, CPI increased 3.89% yoy in the 1H of February (from 4.21% in the 2H of January), within the upper bound of the range around central bank’s target (4.0%), with core CPI decelerating slightly, to 3.51% (from 3.55%).

At the margin, headline and core inflation decelerated sharply. We estimate that seasonally-adjusted three-month annualized inflation posted 0.31% in February (from 2.73% in January) for the CPI and 2.88% (from 3.65% in January) for the core index. 

We expect inflation to reach 3.8% for the end of this year. Importantly, core inflation, which Banxico’s board is closely monitoring, is gradually falling. While the recent numbers suggest downside risks for our inflation forecast, we note that remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and over domestic policy direction, at a time that the economy is operating with no slack, continue to be relevant upside risks for inflation.
** Full story here. 

Day ahead: At 11:00 AM (SP Time), the statistics institute (INEGI) will publish 4Q18 GDP growth, which we expect a growth rate of 1.8% yoy. INEGI will also publish December’s monthly GDP proxy (IGAE), which we forecast at 0.8% yoy (after growing 1.8% in November). Also, the Central Bank will publish 4Q18 current account balance. We expect a deficit of 1.6% of GDP in 2018.


The board continues to see the need to accumulate reserves. As expected, the press release from the February 22 non-policy rate meeting expressed the continued auction of put options (USD 400 million cap, under the same rules defined since September) to take place on February 28 and mature on April 1st. So far in February, USD 325 of the USD 400 million cap has be exercised (in January the full cap was reached). The accumulation of reserves follows the possible reduction of the flexible credit line with the IMF in 2020.

In another press release, the central bank conveyed measures undertaken to prevent pressures on short-term liquidity. Since the end of last year, the central bank noted that there has been an increase in the deposits of the National Treasury at the central bank. Increases in these deposits drain liquidity from the economy. To prevent pressures on short-term liquidity, the central bank carried out 90-day REPOS auctions for $ 2 trillion pesos (approx. USD 643 million) and 14 days for $ 3 trillion (approx. USD 966 million). The supply of the rest of the short-term liquidity, approximately $ 14 trillion, will be auctioned in terms of one day. The central bank will use the different instruments available to ensure that the short-term interest rate remains in line with the policy interest rate and that liquidity terms re spond to the needs of the market.

The next monetary policy decision will take place on March 29 and we do not see the board in any haste to decrease the monetary stimulus. A still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term. A modest hiking cycle only in 2H19 remains our base case scenario.


Peru’s GDP economy grew 4.0% in 2018. Year over year, GDP grew 4.8% in the 4Q18 (from 2.4% in the 3Q18), taking the 2018 annual growth rate to 4.0%. At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy expanded 11.9% (annualized) in 4Q18 (from -8.3% qoq/saar in the previous quarter).

Final domestic demand accelerated in 4Q18. Final domestic demand grew 3.8% yoy in the 4Q18 (from 3.0% in the 3Q18). Gross fixed private investment expanded by 2.1% yoy (from 1.6%). Finally, exports grew 2.6% yoy (from -0.6% in the 3Q18), while imports decreased 1.7% yoy (from 1.2% in the 3Q18).

We expect a GDP growth of 4.0% for 2019, assuming that trade tensions dissipate (benefiting metal commodity prices and, consequently, investment) and a still-expansionary monetary policy, which would offset lower fiscal impulse. The main risk to our macro outlook is the possibility of a further escalation in the trade dispute between the U.S. and China (Peru’s top two trading partners). Another downside risk is a sharp deceleration of public investment at the subnational and regional levels, as most of the newly elected officials that took office in 2019 lack experience (affecting budget execution).

On another note, Peru’s current account deficit (CAD) deteriorated in 2018, but remained narrow and fully funded by FDI. The current account deficit deteriorated to 1.5% of GDP in 2018 (from a deficit of 1.2% in 2017), dragged by a slightly wider services deficit (1.1% of GDP, from 0.7% of GDP) and higher net income payments (mainly profits from foreign mining firms), while trade balance remained practically unchanged at 3.1% of GDP. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (2.9% of GDP in 2018). 

Finally, the nominal fiscal deficit improved in 2018. The nominal fiscal deficit narrowed to 2.5% of GDP in 2018 (from 3.1% of GDP in 2017) due to an improvement of fiscal revenues, reflecting activity recovery. Looking forward, the Ministry of Finance targets a nominal fiscal deficit of 2.7% of GDP for 2019 and a gradual reduction to 1.0% of GDP by 2021. Turning to public debt ratios, gross debt increased to 25.7% of GDP in 2018 (from 24.9% of GDP in 2017), while net debt reached 11.4% of GDP (from 9.5%). Gross Debt ratio comply with Peru’s fiscal rule, which dictates that the gross public debt to GDP cannot exceed 30%. 
** Full story here.


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.

Day ahead: January’s current account balance will be released at 10:30 (SP Time), for which we expect a $7.4 billion deficit. January’s direct investment in the country will also come out, reaching USD 4.5 billion in our forecasts. 

The Week Ahead in Latam


The INDEC will publish the EMAE (official monthly GDP proxy) for December 2018 on Wednesday. The IGA (GDP proxy published by OJF consulting firm) fell 6.4% yoy in December, accumulating a 2.1% drop in 2018. Our forecast for 2018 is an economic contraction of 2.2%.  

Tax collection for February will see the light on Friday. Argentina’s tax revenue totaled ARS 363.9 billion in January, marking a 38.9% yoy nominal expansion (-6.9% in real terms). We expect tax collection to increase 40% yoy to ARS 330 billion in February, but it will likely continue to fall in real terms due to weak activity. 


The confirmation hearing for Roberto Campos Neto nomination as the Central Bank governor, in the Senate, is scheduled for Tuesday (26), at 10:00 AM. Additionally, local news indicate that the Constitution and Justice Committee (CCJ) – the first committee to examine the pension reform on its approval process - will probably be built on the same day.

On economic activity, the highlight will be 4Q18’s GDP, on Thursday. We forecast zero growth qoq/sa, leading to a 1.1% GDP growth in 2018 and setting a weak carryover for 2019. January’s CAGED formal job creation will likely be released (date not yet specified), for which we forecast a net creation of 96k jobs. Adjusting for seasonality, our forecast implies a 70k formal jobs creation, slightly increasing the 3-month s.a. moving average from 61k to 65k. Also, January’s PNAD national unemployment rate will come out on Wednesday, for which we forecast a 0.4 p.p. increase to 12.0% (stable at 12.3%, seasonally adjusted). Finally, FGV’s business confidence surveys for February, industry, commerce and services, as well as the economic uncertainty indicator, will be released throughout the week.

On external accounts, we expect the current account (today) to post a $7.4 billion deficit in January, above the USD 6.3 billion deficit seen in the same month of 2018. Over 12 months, we expect the current account deficit to reach USD 15.6 billion (0.8% of the GDP) and the 3-month seasonally adjusted moving average to decrease to a USD 9.9 deficit. Direct investment in the country will likely amount to USD 4.5 billion in January, leading the 12-month reading to USD 84 bill ion (4.4% of GDP). Also, February’s trade balance will be released on Friday, for which we expect a USD 2.8 bn surplus, in line with the observed in the same month of last year. In month-over month-terms, exports and imports are set to decrease 25% and 21%, respectively. However, it’s worth noticing that imports and exports (on a lesser extent) were inflated by oil platform transactions in January. Over 12 months, we expect the trade balance to retreat slightly to USD 57 bn (from USD 58 bn).

Finally, on fiscal accounts, relative to January, we expect the central government (Wed.) to post a BRL 31.8 bn primary surplus, and the consolidated public sector (Thu.) to post a BRL 48.8 bn primary surplus.


On Thursday, the national institute of statistics (INE) releases industrial activity indicators for January. Industrial production increased 1.0% yoy in the final month of 2018 (0.4% in November), led by the 1.3% rise in mining while manufacturing disappointed with mild growth of 0.8% (-4.7% in November). Electricity generation in January remained weak, contracting 0.4%. Hence, we expect manufacturing production to increase 0.3% yoy, aided by a favorable calendar effect.

On the same day, INE releases the national unemployment rate for the quarter ending in January. The composition of net job creation remained favorable in 4Q18, while total employment growth stabilized following a prolonged slowdown period. The unemployment rate of 6.7% for 4Q18 was 0.3pp higher than one year ago. Meanwhile, the labor force growth was 1.1% yoy in 4Q18 (0.9% in 3Q18), with salaried job creation leading employment growth. We expect the unemployment rate to come in at 6.8%, above the 6.5% recorded one year before, with salaried posts still driving job growth.


On Wednesday, think-tank Fedesarrollo will publish industrial confidence for January. At the end of 2018, industrial confidence was still in pessimistic territory (< 0), but improved to -1.1%, from -4.8% one year earlier and -4.3% in November. There was an advancement in volume of orders, while expectations for production in the upcoming quarter remained optimistic. Meanwhile, retail confidence remains well into optimistic territory at 29.3% (21.4% in December 2017 and 28.0% in November), likely boosted by low inflation and the monetary stimulus in place.

On Thursday, the institute of statistics will release the unemployment rate for January. The unemployment rate in the month of December surprised to the upside, as urban labor dynamics deteriorated. The national unemployment rate picked up to 9.7%, 1.1pp up from the close of 2017, as the urban unemployment rate rose to 10.8% (9.9% one year earlier). Falling urban participation and job destruction at the end of 2018 reflects a weak labor market that poses a risk to the anticipated consumption recovery. We expect the urban unemployment rate in January to come in at 13.6% (13.4% one year before).

On Thursday, GDP for the final quarter of 2018 will be published. In 3Q18, a gradual activity recovery continued to unfold in Colombia with GDP growing 2.7% yoy (NSA; 2.8% in 2Q18). Positive news came from growth in construction and from mining returning to positive territory after 12 consecutive quarters of contraction. We expected growth of 2.8% for the original series in 4Q18, led by commerce and financial services. The demand-side breakdown will be published one week later. 

Also on Thursday, the coincident activity indicator (ISE) for the month of December will be released. In November, ISE came in well below expectations. The original series grew 2.2% yoy, similar to the 2.3% recorded in October. Hence, despite strong sectoral data, still weak performance from the coincident activity indicator hints that the activity recovery is yet to consolidate. For December, we expect ISE to grow at a stable 2.3% yoy, driven retail sales.


Starting the week, the statistics institute (INEGI) will publish 4Q18 GDP growth, which we expect to post a growth rate of 1.8% yoy, in line with INEGI’s flash estimate, taking the annual growth rate to 2.0% in 2018. Industrial production weakened in the 4Q18, dragged by the manufacturing sector (in line with the recent weakness in manufacturing exports and reflecting some deceleration in the US manufacturing sector). In turn, mining activities contracted further, associated to the fall in oil output, while construction also weakened. Moreover, we expect the services sector growth rate moderated and primary sector accelerated in line with INEGI’s flash estimate.  

Along with the quarterly GDP data, INEGI will also publish December’s monthly GDP proxy (IGAE), which we forecast at 0.8% yoy (after growing 1.8% in November). 

Shortly after, the Central Bank will publish 4Q18 current account balance. We expect the current account deficit (CAD) at 1.6% of GDP in 2018. Moreover, we expect the CAD to be fully funded through FDI (expected at 2.3% of GDP for 2018).  

On Tuesday, the statistics institute (INEGI) will announce December’s retail sales. We estimate that retail sales grew 3.3% yoy, from 3.4% in November. Private consumption indicators have shown moderation, consistent with the recent weakness in the labor market (formal employment grew 3.3% yoy in January, down from an average expansion of 4.4% in 2018). 

In the middle of the week, INEGI will announce January’s unemployment rate. We expect the unemployment rate to post a rate of 3.4%. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment increased 3.3% yoy in January.

The same day, INEGI will announce January’s trade balance. It will be key to monitor the breakdown of exports and imports, to get a better sense of how intense the economic slowdown is.

In the middle of the week, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (4Q18). 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. We expect Banxico to adjust down its economic growth forecast for 2019 due to recent economic activity weakness and reflecting the board’s concern on GDP growth that appeared in the last monetary policy statement and its corresponding minutes. 


Ending the week, the statistics institute (INEI) will announce February’s CPI, which we forecast at 0.24% mom. Assuming our forecast is correct, annual headline inflation would post a growth rate of 2.12% yoy in February (practically unchanged from January).

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