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Stable rates in Peru, but with a more hawkish stance

June 11, 2021

We expect the BCRP to keep its policy rate unchanged at 0.25% amid limited underlying inflationary pressures and a still negative output gap

We released yesterday our monthly macro scenario reports for Brazil (see here), Chile (see here) and Mexico (see here). Our monthly macro scenario reports for Argentina, Colombia and the global economy will be published today.

Talk of the Day

Peru

COVID-19 update: According to the Ministry of Health, Peru has vaccinated 9.4% of its population (3.1 million individuals) with the first dose, while 4.4% (1.5 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 37,624 (down 58% vs. one week ago, -65% vs. two weeks ago and -27% vs. 30 days ago). Peru registered a daily increase of 322 deaths and 3,270 confirmed cases. The 7-day moving average of deaths is currently at 362 (up 62% vs. two weeks ago and +26% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 3,682 (down 19% vs. two weeks ago and -35% vs. 30 days ago). The total number of deaths reached 187,479, with 1,991,203 confirmed cases, which implies a 9.4% mortality rate.

In its June’s meeting, the Central Bank of Peru (BCRP) decided to keep its policy rate at 0.25%, in line with our forecast and market consensus.  The central bank expects inflation to reach the lower inflation target range in 2022 (2%, plus or minus 1%) amid a still negative output gap. While the Board considers appropriate to keep an expansive monetary policy, it no longer expects to maintain it for a prolonged period (compared to the previous statement), reflecting a more hawkish tone at the margin. The BCPR also noted domestic financial markets were highly volatile amid the uncertainty surrounding the elections, mentioning the central bank intervened to mitigate said volatility. We expect the BCRP to keep its policy rate unchanged at 0.25% amid limited underlying inflationary pressures and a still negative output gap. However, greater political stress, which depends on the presidential election outcome, may lead the BCRP to tighten its policy rate before yearend to curb the currency depreciation.

No significant changes in Pedro Castillo's lead in the presidential runoff. The electoral tribunal (JNE) continues reviewing the contested votes. The electoral institute (ONPE) results show (with 99.6% of the votes counted), Pedro Castillo (50.2% of the votes) has a narrow advantage of around 60 thousand votes over Fujimori (49.8%). The rest of the votes (around 0.4%) are under review by the JNE. Meanwhile, Fujimori, arguing irregularities, asked the JNE to nullify 200 thousand votes (in an attempt to turn around the election result), which would be subtracted from the total vote count.

Brazil

COVID-19 update: According to state health departments figures, Brazil has vaccinated 25.2% of its population (53.3 million individuals) with the first dose, while 11.2% (23.6 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 806,370 (up 11% vs. one week ago, +17% vs. two weeks ago and +9% vs. 30 days ago). About 111 million shots were already distributed, with 33 million yet to be administered. Local news suggests that around 40 million additional doses will be deployed throughout June. Brazil registered a daily increase of 2,504 deaths and 88,092 confirmed cases. The 7-day moving average of deaths is currently at 1,804 (up 7% vs. one week ago, -1% vs. two weeks ago and -7% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 58,214 (down 9% vs. one week ago, -3% vs. two weeks ago and -5% vs. 30 days ago). The total number of deaths reached 482,019, with 17,210,969 confirmed cases, which implies a 2.8% mortality rate.

Macro Scenario – A more benign scenario in 2021: The vaccination campaign is advancing and should allow a return to economic normality still this year. The main risk to consider is the emergence of virus strains that may affect the effectiveness of vaccines distributed in the country.  We increased our GDP growth forecast for this year to 5.5% from 5.0%, incorporating a higher-than-expected result in 1Q21. For 2022, we continue to expect a deceleration toward +1.8%. Better data at the margin and higher growth expectations led us to revise our estimates for the primary budget deficit to 2.0% in 2021 and 1.0% of GDP in 2022 (from 2.8% and 2.0%, respectively).  We revised our forecasts for gross debt to 81.9 % this year and 81.6% of GDP in 2022 (from 84.1% and 84.5%). A higher Selic benchmark rate and robust commodity prices, together with improved activity and its positive effects on public debt dynamics, are important drivers of currency appreciation. We revised our year-end forecasts to BRL 4.75 per dollar in 2021 (from 5.30) and BRL 5.10 per dollar in 2022 (from 5.50). We lifted our forecast for inflation in 2021 to 5.6% (from 5.3%), incorporating the effects of a stronger economic recovery this year and still-high agricultural commodity prices. The narrower output gap (resulting from stronger growth) puts pressure on inflation. To contain the risks of higher inflation spreading to 2022, the Brazilian Central Bank’s Monetary Policy Committee (Copom) will likely raise the Selic rate to 6.00% p.a. at the end of 2021 (5.50% p.a. in our previous scenario). **Full story here.

IDAT-Activity: Our daily economic activity tracker (IDAT-Activity) decreased 0.1 point, to 100.6 (latest available data from Sunday, June 6). The 7-day moving average advanced 0.7 points, to 101.7. At the margin, the indicator is 26.7 points up from the recent bottom seen on April 4, and is now 9.2 points below this year's highest level, registered on May 7. Compared to its lowest level (April 10, 2020), the index is currently 51.1 points up. See our report here.

Day Ahead: Service sector revenue (PMS) for April will be released at 9:00 AM (BRT). We anticipate a 1.3% mom/sa gain, with the component of services offered to households (highly dependent on social interaction) growing +11.7% mom/sa, partially recovering from the 27.2% mom/sa drop in March. As a result, we expect the year-over-year reading to increase 21.0% (market consensus: 18.7% yoy).

Chile

COVID-19 update: According to the Department of Statistics and Health Information, Chile has vaccinated 59.3% of its population (11.3 million individuals) with the first dose, while 45.4% (8.7 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 90,797 (down 43% vs. one week ago, -44% vs. two weeks ago and -28% vs. 30 days ago). Chile registered a daily increase of 198 deaths and 7,708 confirmed cases. The 7-day moving average of deaths is currently at 106 (down 4% vs. one week ago, +16% vs. two weeks ago and +13% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 7,197 (up 1% vs. one week ago, +11% vs. two weeks ago and +34% vs. 30 days ago). The total number of deaths reached 30,339, with 1,453,478 confirmed cases, which implies a 2.1% mortality rate.

The central bank's analyst survey presents far milder upward revisions to growth, inflation and rates compared to the updated baseline scenario of the central bank (outlined in the IPoM, released on Wednesday). The forecast submission deadline was Wednesday noon, meaning analysts likely responded prior to the central bank’s update. Yearend inflation ticked up 20bps to 3.5% (BCCh: 4.4%), while the medium-term outlook remains anchored to the 3% target. Economic growth was raised 80bps to 7.0% for 2021 (BCCh: 8.5-9.5%), and down 40bps to 3.1% for next year (BCCh: 2-3%). Meanwhile, analysts see the policy rate reaching 0.75% by yearend with a hike in December (+25bps from the last survey; BCCh signaled between rates could reach 1.5%) and rose the rose the 17-month outlook by 25bps to 1.5%. We believe higher short-term activity and inflation forecasts support a start of the normalization cycle as soon as July. We see the board taking the policy rate to 1.5% by year-end, thereafter, a more moderate hiking pace would unfold during 2022 (to 2.5%) and 2023.

Macro Scenario – Faster growth, higher interest rates: COVID-19 cases and ICU loads continue to surge, despite significant progress on the vaccination front. Nevertheless, given that most of the new cases and ICU entries are from individuals yet to be vaccinated or to complete the vaccination course, the rapid inoculation program will likely help to bring relief on the health front in coming months. The election results for the body that is to draft the new constitution showed a rejection of the political establishment. Judging from the message delivered during the campaign, members will probably seek to expand the role of the State and may introduce deeper changes in Chilean institutions (although the autonomy of the central bank is not expected to be challenged). Meanwhile, distrust of the traditional political class opens the path for more populist measures ahead of the November presidential election. With the economic strain from the crisis persisting and strong anti-establishment sentiment, the government and opposition agreed on significant aid through to September (over 3% of GDP for 3Q21). The substantial liquidity injection will consolidate the consumption-led economic recovery (we revised our growth call for this year upward by 2 pp to 8.5%, but reduced the forecast for 2022 to 2.7%, from 3.2% in our previous scenario). Stronger-than-expected activity and significant additional stimulus (fiscal and early pension withdrawals) led the central bank to adopt a more hawkish stance. As a result, an earlier start to the monetary policy normalization cycle is anticipated. We now expect four 25-bp rate hikes this year, starting as early as July, bringing the policy rate to 1.5% by the end of this year. **Full story here.

Paraguay

The fiscal deficit accumulated over twelve months fell to 4.1% of GDP in May from 5.4% in 1Q21 and 6.2% at the end of 2020. Total revenues rose 37.4% yoy in real terms in the quarter ended in May (+4.4% in 1Q21), driven by the recovery in activity and helped by a favorable base effect as the lockdowns hit severely revenues in the same period of 2020. On the other hand, primary spending fell 14.8% yoy in the quarter ended in May in real terms (-12.5% yoy in 1Q21). We highlight the reduction in social expenditures (-36.3% yoy deflated by inflation) and capital expenditures (-30.5% yoy), which in both cases increased significantly in 2Q20. We forecast a fiscal deficit of 4.0% of GDP this year. We expect lower expenditures related to the Covid-19 and a rise in tax collection due to stronger activity to lead to a narrower fiscal deficit. However, the government is working on a new Emergency Law to assist those sectors most affected by COVID-19, with a fiscal cost estimated at USD 365 million (around 1.0% of GDP), which may lead to a higher deficit. Meanwhile, gross public debt rose at the margin. The latest figure as of April 2021 showed that the gross public debt rose to USD 13.0 billion (estimated at 34.1% of GDP), up from USD 12.2 billion in December 2020 mostly due to the issuance of global bonds at the beginning of the year. The external public debt reached USD 11.1 billion in April (85% of total public debt and 29.1% of GDP).

Day Ahead: The central bank of Paraguay will publish its monthly GDP proxy (IMAEP) for April during the day, which we expect at 21.0% yoy (from 8.0% In March), reflecting mainly a favorable base effect due to a sharp fall in economic activity a year ago when strict social distancing measures started. At the margin we expect a deterioration in economic activity associated to some retightening of social distancing measures.

Mexico

COVID-19 update: According to the Secretary of Health, Mexico has vaccinated 19.1% of its population (24.6 million individuals) with the first dose, while 11.1% (14.4 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 482,326 (down 37% vs. one week ago, +11% vs. two weeks ago and +37% vs. 30 days ago). Mexico registered a daily increase of 253 deaths and 3,855 confirmed cases. The 7-day moving average of deaths is currently at 172 (down 24% vs. two weeks ago and -24% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 2,563 (up 15% vs. two weeks ago and +16% vs. 30 days ago). The total number of deaths reached 229,353, with 2,441,866 confirmed cases, which implies a 9.4% mortality rate.

Macro Scenario – Higher inflation, higher interest rates: The Covid-19 pandemic is, at least for now, more controlled, allowing authorities to continue easing social-distancing measures. The inoculation campaign picked up as vaccine deliveries accelerated and AstraZeneca’s local vaccine manufacturing yielded its first batch of doses. Preliminary results show the ruling coalition’s political power in Congress declined as it lost its qualified majority in the Lower House, reducing its capacity to pass constitutional changes. Still, it kept an absolute majority (50%+1), which will allow it to control important items of the legislative agenda such as a potential tax reform and the budgetary process. We revised our 2021 GDP growth forecast to 6.5% (from 6.0%) reflecting a faster recovery in the services sector amid the easing of social-distancing measures. We also revised our 2021 inflation forecast to 5.0% (compared with our previous forecast of 4.4%), reflecting recent upside surprises. Amid increasing inflationary pressures and a faster reduction of the output gap, we now expect Banxico to start hiking its policy rate in the second half of 2021, reaching an end-of-year level of 4.50% (through two 25-bp rate hikes). For 2022, we expect four additional 25-bp rate increases (bringing the policy rate to 5.50%). **Full story here.

Argentina

COVID-19 update: According to the Ministry of Health, Argentina has vaccinated 26.5% of its population (11.9 million individuals) with the first dose, while 7% (3.1 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 276,220 (up 14% vs. one week ago, +111% vs. two weeks ago and +95% vs. 30 days ago). Argentina registered a daily increase of 669 deaths and 27,628 confirmed cases. The 7-day moving average of deaths is currently at 581 (up 9% vs. one week ago, +23% vs. two weeks ago and +38% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 25,958 (down 15% vs. one week ago, -17% vs. two weeks ago and +26% vs. 30 days ago). The total number of deaths reached 83,941, with 4,066,156 confirmed cases, which implies a 2.1% mortality rate.

Colombia

COVID-19 update: According to the Ministry of Health, Colombia has vaccinated 16.2% of its population (8.3 million individuals) with the first dose, while 6.8% (3.5 million) are fully vaccinated. The 7-day moving average of daily vaccination is currently at 147,977 (down 52% vs. one week ago, +24% vs. two weeks ago and -29% vs. 30 days ago). Colombia registered a daily increase of 550 deaths and 24,233 confirmed cases. The 7-day moving average of deaths is currently at 524 (stable vs. one week ago, +6% vs. two weeks ago and +17% vs. 30 days ago). Meanwhile, the 7-day moving average of cases stands at 25,202 (up 4% vs. one week ago, +24% vs. two weeks ago and +58% vs. 30 days ago). The total number of deaths reached 93,473, with 3,635,835 confirmed cases, which implies a 2.6% mortality rate.



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