Itaú BBA - Sequential activity declines in Colombia

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Sequential activity declines in Colombia

June 16, 2021

We expect GDP growth of 6.5% this year (6.8% decline in 2020)

Talk of the Day

Colombia

COVID-19 update: According to the Ministry of Health, Colombia has vaccinated 18% of its population (9.2 million individuals) with the first dose, while 7.5% (3.8 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 184,466 (down 19% vs. one week ago, -27% vs. two weeks ago and -5% vs. 30 days ago). Colombia registered a daily increase of 588 deaths and 24,376 confirmed cases. The 7-day moving average of deaths is currently at 553 (up 7% vs. one week ago, +7% vs. two weeks ago and +12% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 26,369 (up 3% vs. one week ago, +14% vs. two weeks ago and +60% vs. 30 days ago). The total number of deaths reached 96,366, with 3,777,600 confirmed cases, which implies a 2.6% mortality rate.

Activity indicators for the month of April expectedly posted large annual increases, due to base effects. Retail sales grew 75% yoy in April (+20.1% in March), in line with our forecast and close to the market consensus of a 77.5% expansion, as the lowest base of comparison from last year was encountered (42.9% yoy contraction). At the margin, retail sales (excluding fuels and vehicles) retreated 6.6% from March to April. The sequential retail sales decline may persist through May as protest action persisted, but a swift rebound going forward is likely as mobility restrictions were recently eased. Meanwhile, manufacturing increased 63.7% yoy, above market consensus of 61.5% and our 60.0% call (+20.8% in March; 35.7% drop one year ago). As has been the case during the pandemic, manufacturing was less affected by the lockdown. Sequentially, manufacturing retreated a mild 1.0% from March. Overall, the data is consistent with a 30% yoy increase for the coincident activity indicator (ISE), to be released on Friday. We expect GDP growth of 6.5% this year (6.8% decline in 2020). The stronger-than-expected statistical carryover at the start of the year would mitigate the impact on 2021 growth from the reactivation of distancing measures and protest events during 2Q21. **Full story here.

Colombia outlined its gradual fiscal adjustment plan that seeks to see net debt to GDP peak in 2022 at just over 65% (60.4% last year), retreating towards the net debt anchor of 55% over the next decade. In the Medium-Term Fiscal Plan, the Colombian government raised the 2021 growth forecast by 1pp to 6% (Itaú: 6.5%) and sees a 4.3% increase next year (Itaú: 3.0%). Overall, it maintained the 8.6% fiscal deficit forecast for 2021 (up from 7.8% last year). A still-wide 7.0% of GDP deficit is expected for 2022 as spending as a percent of GDP would only moderate by 1.6pp from this year to 23.2% (similar to 2020). The bulk of additional revenue from an expected tax reform is only expected from 2023 onwards. Meanwhile, part of the expected revenue in the short-term is from the sale of assets (1.3% of GDP this year and 0.6% in 2022). The Finance Minister announced the new tax bill will be submitted to Congress in July. Recently S&P downgraded Colombia’s sovereign debt rating to BB+, with a stable outlook, on the belief that prospects for substantial structural reforms are low in the near term, given social discontent and the upcoming election cycle in 2022. Fitch announced that it will review Colombia’s rating in the short term. The rating agency will conduct its periodic mid-year review of Colombia’s sovereign credit rating evaluating the impact of protests on short- and medium-term growth. According to the senior director of Fitch, the agency wants to see Colombia’s debt levels stabilize and begin to fall. Fitch rates Colombia at BBB- (lowest investment grade) and Moody’s still holds Colombia's rating two notches into investment grade (Baa2, negative outlook). The scars of the pandemic and limited political room to implement structural reforms mean that the loss of the investment-grade rating from Fitch is likely.

Short-term inflation expectations continue to rise, but medium-term outlook is anchored. Nevertheless, the start of the hiking cycle was brought forward once more. According to the central bank’s monthly analyst survey, the 2021 inflation expectation increased 44bp to 3.68% (3.24% previously; Itaú 3.7%) following another upside surprise in May amid supply disruption during protest. Meanwhile, the one-year inflation outlook increased to 2.99% (2.88% previously), in line with the 3% target, while the two-year inflation expectation moderated to 3.06% (3.10% previously). Yearend core inflation (excluding food prices) expectations remain controlled at 2.80% (2.76% previously), and at the 3% target for the two-year horizon. On the monetary policy front, analysts continue to foresee one rate increase this year to 2.0%, but are now anticipating the increase to unfold in October (rather the December). A gradual process in 2022 is expected, with rates seen reaching 3.0% at the close of next year. We too expect the policy rate at 2.0% by the end of 2021 amid a swift activity recovery, rising inflation and persistent external imbalances. The still fragile labor market likely prevents an earlier and swifter tightening of monetary policy. The next monetary policy meeting will take place on Monday, June 28. 

Mexico

COVID-19 update: According to the Secretary of Health, Mexico has vaccinated 20.4% of its population (26.3 million individuals) with the first dose, while 11.7% (15.1 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 413,791 (down 32% vs. one week ago, -31% vs. two weeks ago and +21% vs. 30 days ago). Mexico registered a daily increase of 37 deaths and 1,175 confirmed cases. The 7-day moving average of deaths is currently at 193 (up 7% vs. one week ago and -7% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 2,970 (up 20% vs. one week ago and +29% vs. 30 days ago). The total number of deaths reached 230,187, with 2,455,351 confirmed cases, which implies a 9.4% mortality rate.

 

Mexico affirmed at BBB by S&P, the second-lowest investment grade score. The rating agency expects ongoing cautious macroeconomic management, with net general government debt holding steady at about 48% of GDP over the next three years, while growth decelerates after a 5.8% rebound in 2021 as pressures on the business climate--some long-standing and some associated with recent policy steps- weigh on investment. The outlook remains negative, indicating the risk of a downgrade over the coming 12 months due to either weakening public finances, likely arising from managing complex fiscal challenges related to PEMEX, or the possibility that some government initiatives could further weigh on the business climate.

Peru

COVID-19 update: According to the Ministry of Health, Peru has vaccinated 10.6% of its population (3.5 million individuals) with the first dose, while 5.7% (1.9 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 122,275 (up 102% vs. one week ago, +21% vs. two weeks ago and +80% vs. 30 days ago). Peru registered a daily increase of 213 deaths and 627 confirmed cases. The 7-day moving average of deaths is currently at 309 (down 18% vs. one week ago and +2% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 2,750 (down 28% vs. one week ago and -50% vs. 30 days ago). The total number of deaths reached 188,921, with 2,004,252 confirmed cases, which implies a 9.4% mortality rate.

The electoral institute counted 100% of the votes, showing Pedro Castillo has an advantage of around 44 thousand votes over Fujimori. However, Fujimori’s team is looking to nullify around 200 thousand votes (arguing irregularities), although only around 20% of those motions were admitted at the electoral tribunal as the rest were sent after the deadline. Fujimori’s team will also challenge the electoral tribunal decision of not admitting those motions after 8 pm of last Wednesday, arguing the legal deadline is three days after election, thus they still had 4 hours left. Meanwhile, Pedro Castillo denounced today some interested groups are looking to overturn Peru’s election, while her VP said their victory is irreversible.

The monthly GDP proxy expanded 58.5% year over year in April (from 18.2% in March), below our forecast and market expectations (both at 60%). The monthly GDP was boosted mainly by a favorable base effect as strict social distancing measures, which affected non-essential activities, started in the second half of March 2020 and tightened further in April 2020. Still, at the margin, the monthly GDP weakened in April, dragged by a deterioration in volatile fishing output and in the construction sector. Using seasonally adjusted series, published by Peru’s statistics institute, the monthly GDP fell by 0.8% month over month in April. 

Brazil

COVID-19 update: According to state health departments figures, Brazil has vaccinated 27.1% of its population (57.6 million individuals) with the first dose, while 11.3% (24.0 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 996,606 (up 33% vs. one week ago, +20% vs. two weeks ago and +53% vs. 30 days ago). About 115 million shots were already distributed, with 34 million yet to be administered. Local news suggests that around 41 million additional doses will be deployed throughout June. Brazil registered a daily increase of 2,468 deaths and 80,609 confirmed cases. The 7-day moving average of deaths is currently at 1,986 (up 18% vs. one week ago, +5% vs. two weeks ago and +4% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 70,870 (up 23% vs. one week ago, +11% vs. two weeks ago and +11% vs. 30 days ago). The total number of deaths reached 490,696, with 17,533,221 confirmed cases, which implies a 2.8% mortality rate.

IDAT-Activity: Our daily economic activity tracker (IDAT-Activity) decreased 5.2 points, to 105.8 (latest available data from Friday, June 11). The 7-day moving average advanced 0.6 points, to 104.9. At the margin, the indicator is 31.9 points up from the recent bottom seen on April 4, and is now 5.2 points below this year's highest level, registered on June 10. Compared to its lowest level (April 10, 2020), the index is currently 56.3 points up. See our report here.

Day Ahead: At 6:30 PM (BRT), the Copom will announce its monetary policy decision. In our view, the committee will hike the Selic rate by 75 bps. This decision was signaled by the committee and is widely expected by market participants, but it will be particularly important to follow the monetary authority’s signals about its next steps, especially about the next meeting, in August. See our full report on today’s monetary policy decision here. In addition, the Senate may vote today the provisional measure dealing with the privatization of Eletrobras.

Argentina

COVID-19 update: According to the Ministry of Health, Argentina has vaccinated 29% of its population (13.0 million individuals) with the first dose, while 7.4% (3.3 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 245,463 (down 22% vs. one week ago, +17% vs. two weeks ago and +95% vs. 30 days ago). Argentina registered a daily increase of 586 deaths and 27,323 confirmed cases. The 7-day moving average of deaths is currently at 564 (stable vs. one week ago, +6% vs. two weeks ago and +23% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 23,424 (down 12% vs. one week ago, -29% vs. two weeks ago and -4% vs. 30 days ago). The total number of deaths reached 86,615, with 4,172,742 confirmed cases, which implies a 2.1% mortality rate.

Day Ahead: The INDEC (the official statistical agency) will publish the national CPI for May at 4:00 PM (BRT). According to price-tracker Eco Go consulting, consumer prices increased 3.6% mom in May. If this estimation is correct, the 12-month inflation will accelerate to 49.3% from 46.3% in April 2021.

Chile

COVID-19 update: According to the Department of Statistics and Health Information, Chile has vaccinated 60.9% of its population (11.6 million individuals) with the first dose, while 47.1% (9.0 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 91,231 (down 40% vs. one week ago, -43% vs. two weeks ago and -26% vs. 30 days ago). Chile registered a daily increase of 61 deaths and 4,576 confirmed cases. The 7-day moving average of deaths is currently at 109 (up 1% vs. one week ago, 0% vs. two weeks ago and +24% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 6,689 (down 8% vs. one week ago, -7% vs. two weeks ago and +19% vs. 30 days ago). The total number of deaths reached 30,865, with 1,487,239 confirmed cases, which implies a 2.1% mortality rate.



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