Itaú BBA - Industrial confidence slightly increases in Brazil

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Industrial confidence slightly increases in Brazil

April 29, 2019

While still timid, the advance is better than the sideway movements registered in other sectors in the same period.

See our Week Ahead full note at the end of this report.

Talk of the Day

Brazil

Business confidence in the industrial sector increased 0.7 p.p. to 97.9 in April, according to FGV’s monthly industry survey, a bit higher than the preview released last week and partially offsetting the 1.8 p.p. decline registered in the previous month. The breakdown shows an increase in the current conditions index (1.4 p.p.), but the expectations component remained flat in the period. Capacity utilization in the sector (NUCI) receded 0.2 pp. to 74.5%, still indicating a substantial spare capacity in the industrial sector. 

New non-earmarked loans grew 2.1% mom/sa in real terms, according to Central Bank’s credit figures for March. In the same comparison, new earmarked loans fell by 0.7%. Seasonally-adjusted, delinquency remained virtually flat, at 3.0%. The average interest rate charged in non-earmarked loans rose to 39.0% from 38.6%, but declined 2.6 p.p. in year-over-year terms. The same pattern was observed in the average interest rate charged in earmarked loans, which advanced slightly in the month (+0.1 p.p.), but fell 0.7 p.p. in the annual comparison.
** Full story
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Macro Vision: Our latest study discusses the pension reform proposed to the National Congress, its fiscal impact and possible changes on its contents. The reform implies savings of about BRL 1.25 trillion over 10 years between 2020 and 2029, or a primary result around 2.5 p.p. higher in 2027, compared with the scenario without reforms. We estimated the impact item by item of the reform proposal and of eventual dilutions in the proposal. We expect that a reform will be approved with a fiscal impact of 50% to 75% relative to the proposal sent by the government, i.e., with savings of BRL 670 -990 billion over 10 years and a primary result between 1.4 p.p. and 1.9 p.p. of GDP higher in 2027, after the removal of changes in rural pensions, the welfare benefit program ("BPC") and the minimum contribution time, in addition to changes in transition rules.
** Full story
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Orange Book: In our conversations with the real sector, we noticed that little has changed regarding decision making by business owners and consumers in the last few months. Our contacts continue to be more optimistic than they were until November of last year, but the wave of confidence lost momentum in the beginning of this year. The pension reform is increasingly seen as the game changer. In this context, we still see demand recovering very gradually in most sectors. Investments have been erratic, without a consistent pattern of acceleration or increasing production capacity.
** Full story
here.

Day Ahead: The central government’s budget balance for March will be released, for which we expect a deficit of BRL 28.4 bln. 

Colombia

The central bank kept the monetary policy rate at 4.25% at April’s monetary policy meeting, as widely expected. The unanimous decision was communicated in an unusually short press release, which retained a neutral stance. A new element in the communiqué is the introduction of the balance of payments in the concluding paragraph (not present in more than a year) as one factor to monitor by the board. However, general manager Echavarría downplayed the modification during the press conference and has previously stated the effect of interest rates on external accounts is not clear, so we still see stable rates remaining the most likely scenario going forward. The board highlighted that inflation is under control, despite the upside surprise in relation to market expectations in March. Analysts’ inflation forecasts were broadly unchanged from the March meeting at 3.2%, while core inflation expectations remained below the central bank’s 3% target, at 2.82%. Central bankers appear bullish on activity, with the technical team reiterating its 3.5% growth forecast for this year (Itaú: 3.3%; 2.7% in 2018).

With inflation pressures subdued, inflation expectations anchored, monetary policy rate close to neutral and the pace of growth recovery still restrained, we believe that the central bank will remain on hold throughout the year, at 4.25%. Echavarria’s downplaying of the likelihood of interest rate cuts or hikes for the time being supports our call. As the Colombian economy is currently vulnerable to external factors, additional widening in the CAD or tightening of financial conditions could change the board’s mood. The next monetary policy decision will take place on June 21.
** Full story
here.

Mexico

Monthly GDP decelerated in the quarter ended in February, with industrial and services sectors slowing down. Mexico’s monthly GDP proxy (IGAE) expanded 1.1% yoy in February (from 1.25% in January), slightly above our forecast (0.9%) and market expectations (0.98%) – taking the three month moving average (3mma) growth rate to 0.8% (from 1.1% in January). Using calendar adjusted figures, published by the statistics institute (INEGI), the 3mma growth rate was similar. At the margin, GDP momentum remained weak, dragged by industrial and services sectors. Using seasonally-adjusted figures, monthly GDP grew 0.4% mom in February (from 0.2% in the previous month), taking the quarter-over-quarter annualized growth (qoq/saar) rate to -0.1% (from 0.1%). We expect economic activity to slow to 1.4% in 2019, from 2.0% in the last year. While we note that one-off factors could be behind part of economic weakness in early 2019, uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment. Deceleration in the U.S. economy will also curb growth. In this context, employment is already weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown.
** Full story
here.

Trade deficit narrowed at the margin in the 1Q19. Monthly trade balance posted a USD 1.4 billion surplus in March, slightly below median market expectations (USD 1.6 billion surplus) – taking the 12-month rolling deficit to USD 14.1 billion in March (from a deficit of USD 13.8 billion in February). Looking at the breakdown, also using 12-month rolling figures, energy deficit improved slightly (USD 23.2 billion in March, from USD 23.4 billion in February), while non-energy balance deteriorated somewhat, posting a surplus of USD 9.1 Billion (from USD 9.6 Billion). At the margin, manufacturing exports improved in 1Q19, but still grew at a soft pace. Imports also improved on a sequential basis in 1Q19, but grew at a below trend pace, reflecting some weakness in internal demand. We expect the trade deficit to remain broadly stable between 2018 and 2019. Oil production doesn’t seem to be stabilizing yet - so the improvement in energy balance is unlikely to last - and the deceleration of the U.S. economy will exert downward pressure on Mexico’s manufacturing export growth. However, uncertainty over domestic policies and over the USMCA approval in US Congress will likely curb internal demand.
** Full story
here.

The Week Ahead in LatAm

Argentina

The INDEC will publish the EMAE (official monthly GDP proxy) for February on Tuesday. According to leading and coincident indicators, the economic activity grew on a sequential basis in February. Official indicators for industrial output and construction activity showed month-over-month gains (SA) of 2.4% and 8.3%, respectively. The monthly GDP proxy published by OJF consulting firm (IGA index) rose 1.1% mom/sa in the same period. We forecast a 0.3% gain against January 2019, implying a 5.7% year-over-year drop. 

On Friday, the central bank will release its monthly expectations survey. We expect a new deterioration of inflation expectations due to a weakening peso. In the latest survey, analysts raised their inflation forecasts for 2019 to 36.0% from 31.9%.

Brazil

On economic activity, this week’s highlight will be March’s industrial production, to be released on Friday. We forecast a 0.7% decline on a seasonally adjusted monthly basis, after a 0.7% gain in February. March’s national unemployment rate will come out on Tuesday. We expect a 12.8% unemployment rate, which, in seasonally-adjusted terms, would mean a decline to 12.1% from 12.2% in the previous month. FGV’s business confidence survey for April on services, as well as the economic uncertainty indicator, will also be released on Tuesday. Fenabrave’s vehicle sales for April will probably also come out this week (without a specific date).

April’s trade balance will be released on Thursday, for which we expect a USD 6.9 bn surplus, above the USD 5.9 bn observed in the same month of last year. In month-over-month terms, exports are set to increase 4.5%, while imports are set to decline 7.1%. Over 12 months, we expect the trade balance to increase slightly to USD 57.9 bn (from USD 56.9 bn), while the 3mma saar rate picks up to USD 59.0 bn from USD 57.8 bn.

Additionally, the fiscal accounts for March will come out this week. On Monday, we expect a central government primary deficit of BRL 28.4 bln. On Tuesday, we expect a consolidated government primary deficit of BRL 29.0 bln, with regional governments posting a BRL 0.6 bln surplus and state-owned companies a BRL 0.2 bln deficit.

Chile

The national institute of statistics (INE) releases industrial activity indicators for March on Tuesday. Mining was once again the key drag to industrial production in the month of February, albeit transitory climate factors heightened the decline. Overall, industrial production dropped 3.6% yoy, with mining contracting 9.4% yoy. Meanwhile, manufacturing growth was lower (0.8% yoy vs. 2.6% in January), but the composition remains favorable. With an elevated base of comparison, mining will remain the primary drag to activity in March, while we expect manufacturing to grow 2.8% yoy, partly aided by a low base of comparison.

On the same day, INE releases the national unemployment rate for the first quarter of the year. In the quarter ending in February, the unemployment rate was stable over twelve months (at 6.7%). However, employment grew a mild 0.5% yoy, from 0.7% in 4Q18, but was offset by the slowdown of labor force growth to 0.6% from 1.1%. Meanwhile, the composition of job growth deteriorated with the shedding of private salaried jobs for the first time since 4Q17. We expect the unemployment rate to come in at 7.0%, similar to the 6.9% recorded one year before.

On Friday, INE will publish the private consumption activity indicators for March. Retail activity was weak in February with growth of 0.7% over twelve months (0% in January). Meanwhile, wholesale trade remained robust, still favorably led by sales of investment-linked materials. Low consumer sentiment and falling new car sales point to still weak retail sales growth of 1.0% in March.

Colombia

On Tuesday, the institute of statistics will release the unemployment rate for March. The national unemployment rate picked up to 11.8% in February, from 10.8% one year earlier, with the deterioration mainly due to the urban component. Nevertheless, as the participation rate also increased notably and employment growth accelerated, labor market conditions are likely improving as the economy consolidates its recovery. We expect the urban unemployment rate in March to come in at 11.7% (10.6% one year before), resulting in an urban unemployment rate of 12.5% in 1Q19 (12% in 1Q18).

Mexico

On Tuesday, the statistics institute (INEGI) will publish the flash estimate of Q1’s GDP growth. We estimate 1.1% year-over-year growth (from 1.7% in 4Q18). We expect a weak industrial production sector, dragged by a fall in oil output and a deceleration in the manufacturing sector. In turn, we expect the services sector moderated its growth pace. 

On the same day, the Ministry of Finance (MoF) will publish reports on economic activity, public finances and public debt as of the 1Q19. We expect lower revenues in real terms in 1Q19, dragged mainly by oil revenues (mainly due to the fall in oil production). Likewise, we expect total expenditure (ex-financial cost) to fall, probably associated to a delay in expenditure execution due to the transition effect (at the beginning of the first year of a new administration there is usually under-spending early in the year). 

Also on Tuesday, Mexico’s government will publish the National Development Plan 2019-2024, which includes the strategies and objectives (in general terms) the new Administration will pursue during the next six years. The plan will focus on three areas: (1) Justice and Rule of Law; (2) Welfare and (3) Economic Development.

Peru

In the middle of the week, the statistics institute (INEI) will announce April’s CPI inflation, which we forecast at 0.09% month-over-month. We expect a recovery in domestic demand to push prices gradually up. Assuming our forecast is correct, headline inflation would reach 2.5% year-over-year in April (from 2.3% in March). We note there is an unfavorable base effect in April (which pushes annual inflation up), as monthly inflation in April last year was negative (-0.14% month-over-month).



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